“Buy the first rate hike and sell the penultimate”: will the Wall Street stock market almanac be right?

Historically, the old market saying implies that the first interest rate hikes by the Federal Reserve are “good”, especially in a scenario with relatively strong economic growth and a mid-cycle bull market.

That said, from Bank of America, its chief strategist, Michael Hartnett, warns in a note to his clients that, on this occasion, the stock market almanac is “wrong” since heinflation “is out of control” and even with a more rapid withdrawal of stimulus, central banks “have lost control.”

According to this strategist they have already begun to appear “small cracks” in large-cap tech stocks, the epicenter of the 13-year bull market. Hartnett maintains its bearish stance until investor positioning “show total capitulation” or a credit event on Wall Street prompting central banks to announce a reversal of monetary tightening.

It should be remembered that last week, the Federal Reserve dropped that it could raise interest rates up to three times next year, which unleashed stock market volatility and it has led investors to sell tech stocks. A day later, the Bank of England raised rates for the first time since the start of the pandemic, thus starting a cycle of hikes among the main G7 central banks.

For Hartnett, inflation always precedes recessions and “it’s like having a very high body fever” that “must be reduced by hardening or recession to return body temperature to normal and ensure good health in the future.”

That is why Hartnett and his team recommend going long on the dollar. They also point out that a slowdown in earnings and a flatter yield curve coupled with higher inflation favors quality values and defensive. To hedge against inflation, he advocates for commodities and cutting tech stocks. They also favor emerging markets, including China.

For their part, Barclays strategists have a somewhat different opinion. From your point of view, rate hikes don’t end bull markets, But the reduction of the liquidity of the central banks implies less speculative “foam” and more volatility, according to the strategists led by Emmanuel Cau in a comment to their clients.

Since 1946, the Fed has carried out 17 rate tightening cycles; 13 of them consisted of three rate hikes or more and nine of them occurred in a 12-month period. From the date of the first rate hike to the third, the S&P 500 rose an average of about 3.5% and gained in price 56% of the time, according to data compiled by CFRA Research.

For their part, Deutsche Bank analysts have identified 13 different rise cycles since 1955, whose average duration is less than two years. And according to their findings, which examined the S&P 500’s average price performance on a daily basis, “there is usually strong growth in the first year of the rally cycle, with an average return of 7.7%.”