Fed Funds Rate & S&P 500

Transcription

1 Fed Funds Rate & S&P 500 Figure There have been nine major troughs in the federal funds rate since The tenth is likely to happen this year. The average number of months between troughs is FEDERAL FUNDS RATE (percent) Source: Board of Governors of the Federal Reserve System Figure During the inflation-challenged 1960s, 1970s, and 1980s, S&P 500 peaked 8 months after trough in federal funds rate, on average. The market stalled for 11 months after February 1994 rate hike, but then soared over rest of decade. The late hike was followed by a crash S&P 500 INDEX (ratio scale) June 18, 2004

2 Momentum Figure / Stock market s momentum usually peaks at about the same time as Fed starts a new round of credit tightening. Momentum often rebounds well before the next rate trough S&P 500 INDEX* (percent above/below 200-day moving average) * Monthly through 2000, weekly thereafter. Figure S&P 500 INDEX (yearly percent change) June 18, 2004

3 Valuation Figure Market s trailing P/E often peaks either just before or just after Fed starts to tighten TRAILING P/E RATIO FOR S&P 500* Q1 6/ FORWARD P/E RATIO FOR S&P 500** * Using four-quarter trailing reported earnings. ** Using 52-week forward consensus expected operating earnings per share (mid-month data). Monthly through April 1994, weekly thereafter. Source: Standard & Poor s Corporation and Thomson Financial. Figure T T T T T Interestingly, stocks have been undervalued during previous five rate troughs STOCK VALUATION MODEL (SVM-1)* (percent) Overvalued Undervalued 6/ * Ratio of S&P 500 Index to its Fair-Value (52-week forward consensus expected S&P 500 operating earnings per share divided by the 10-year US Treasury bond yield) minus 100. Monthly through April 1994, weekly thereafter. Source: Standard & Poor s, Thomson Financial and Board of Governors of the Federal Reserve System. 10 June 18,

4 Consumer Discretionary Figure 7. Secular trend in autos relative performance has been down since end of 1960s. Cyclical peaks coincided with 5 of the last 9 rate troughs. S&P 500 AUTOMOBILE MANUFACTURERS (solid line) S&P 500 AUTO PARTS & EQUIPMENT (dotted line) Figure 8. Cycle in Motorcycles tends to peak when interest rates trough. S&P 500 MOTORCYCLE MANUFACTURERS 11 June 18, 2004

5 Homebuilding relative strength is best since early 1970s. Relative performance fell following 6 of the last 9 rate troughs..7 Figure 9. S&P 500 HOMEBUILDING Consumer Discretionary.7.7 Figure Relative strength of Household Appliances tends to peak when federal funds rate troughs. S&P 500 HOUSEHOLD APPLIANCES 12 June 18, 2004

6 Consumer Discretionary Figure Retailers were hot in the 1960s, cold in the 1970s, hot in the 1980s, and cold in the 1990s. Time to get hot again? Cyclical peaks coincided with 5 of the last 9 rate troughs S&P 500 RETAIL DEPARTMENT STORES Figure 12. Apparel & Accessories tend to have a longer multi-year cycle than interest rates. S&P 500 APPAREL & ACCESSORIES 13 June 18, 2004

7 Consumer Discretionary Figure 13. Interest rates don t have much impact on Footwear. S&P 500 FOOTWEAR Figure 14. Restaurants tend to underperform several months after rate cycle troughs. S&P 500 RESTAURANTS 14 June 18, 2004

8 Consumer Discretionary Figure 15. S&P 500 BROADCASTING & CABLE TV Not much correlation between rate cycle and Movies & Entertainment and Broadcasting & Cable TV cycles. Figure 16. S&P 500 MOVIES & ENTERTAINMENT 15 June 18, 2004

9 Consumer Discretionary Figure 17. S&P 500 LODGING & HOTELS Interest rates have little cyclical influence on Lodging & Hotels and Publishing & Printing. Figure 18. S&P 500 PUBLISHING & PRINTING 16 June 18, 2004

10 Consumer Staples Figure 19. Brewers outperformed S&P 500 following 5 of the previous 9 rate lows. S&P 500 BREWERS Figure 20. Perfect score: Soft Drinks outperformed following each of the last 9 rate troughs. S&P 500 SOFT DRINKS 17 June 18, 2004

11 Consumer Staples Figure 21. S&P 500 HOUSEHOLD PRODUCTS Not much correlation between rate cycle and Household and Personal Products cycles. Figure 22. S&P 500 PERSONAL PRODUCTS 18 June 18, 2004

12 Consumer Staples Figure 23. Tobacco tends to outperform several months after rate troughs. S&P 500 TOBACCO Figure 24. No story here. S&P 500 DRUG RETAIL 19 June 18, 2004

13 Consumer Staples Figure Food Retail tends to outperform after interest rates bottom. 5 S&P 500 FOOD RETAIL Figure Seven out of 9: That s how often Packaged Foods & Meats outperformed after rate troughs. 5 0 S&P 500 PACKAGED FOODS & MEATS June 18, 2004

14 Energy Figure Integrated Oil & Gas tends to have same secular trend as S&P 500 and to cyclically outperform for several months around interest rate troughs S&P 500 INTEGRATED OIL & GAS Figure Not much relationship between interest rate cycle and these two Oil & Gas industries. 1 S&P 500 OIL & GAS EQUIPMENT & SERVICES (solid line) 1 1 S&P 500 OIL GAS DRILLING (dotted line) 1 21 June 18, 2004

15 Figure 29. Finance Banks relative strength peaked 5 of last 9 rate troughs. Consumer Finance relative strength peaked around 6 of last 9 rate troughs. Lenders tend to underperform during inflation (1970s-1980s) and to outperform during disinflation (1990s). S&P 500 DIVERSIFIED BANKS.7 Figure S&P 500 CONSUMER FINANCE 22 June 18, 2004

16 Finance Figure P&C relative cycle tends to peak just before rates trough S&P 500 PROPERTY & CASUALTY INSURANCE Figure 32. Health Insurance tends to peak relative to S&P 500 several months after rates start rising. S&P 500 LIFE & HEALTH INSURANCE 23 June 18, 2004

17 Health Care Figure 33. Perfect score: Pharmaceuticals outperformed S&P 500 starting 22 months after each of the last 9 rate troughs, on average. S&P 500 PHARMACEUTICALS Figure 34. Health Care Equipment tends to outperform about halfway between rate troughs. S&P 500 HEALTH CARE EQUIPMENT 24 June 18, 2004

18 Industrials Figure Not much correlation between interest rate cycle and Capital Goods relative strength cycles. 8 6 S&P 500 CAPITAL GOODS Figure 36. Aerospace & Defense has its own cycle. S&P 500 AEROSPACE & DEFENSE 25 June 18, 2004

19 Industrials Figure Start of rate hikes sometimes makes the relative peaks in Electrical Components & Equipment S&P 500 ELECTRICAL COMPONENTS & EQUIPMENT 0 0 Figure 38. Construction & Farm Machinery usually peaks within a few months before or after interest rate bottoms. S&P 500 CONSTRUCTION & FARM MACHINERY 26 June 18, 2004

20 Industrials Figure 39. Building Products usually underperform after rates start rising. S&P 500 BUILDING PRODUCTS Figure 40. Garbage in, garbage out. S&P 500 ENVIRONMENTAL SERVICES 27 June 18, 2004

21 Information Technology Figure Computer Hardware cycle tends to peak near rate troughs. 1 1 S&P 500 COMPUTER HARDWARE 1 1 Figure 42. Semiconductors do their own thing. S&P 500 SEMICONDUCTORS 28 June 18, 2004

22 Materials Figure 43. S&P 500 ALUMINUM Rate cycle has little impact on Aluminum and Steel relative performance. 2 Figure S&P 500 STEEL June 18, 2004

23 Materials Figure 45. Paper & Forest Products tends to briefly outperform after rate troughs. S&P 500 PAPER & FOREST PRODUCTS Figure 46. Paper Packaging often outperforms once interest rates have bottomed. S&P 500 PAPER PACKAGING 30 June 18, 2004

24 Materials Figure 47. Chemicals cycle sometimes bottoms halfway between rate troughs. S&P 500 CHEMICALS 0 Figure No story here. 5 S&P 500 INDUSTRIAL GASES June 18, 2004

25 Materials Figure 49. Metals & Mining tends to outperform between rate troughs. S&P 500 DIVERSIFIED METALS & MINING 5 Figure No story here. 0 S&P 500 METAL & GLASS CONTAINERS June 18, 2004

26 Transportation 1 Figure Interest rate cycle has little impact on the relative performance cycle of airlines S&P 500 AIRLINES Figure Railroads relative performance tends to peak around rate troughs. 0 5 S&P 500 RAILROADS June 18, 2004

27 Utilities Figure Electric Utilities relative performance tends to peak around rate lows. 1 1 S&P 500 ELECTRIC UTILITIES 1 1 Figure 54. No story here. S&P 500 GAS UTILITIES 34 June 18, 2004