Here’s What The “Fed’s Hiking Cycle” Market Backstest Shows
In his note this morning which laid out a somewhat bullish view of how stocks can ramp higher into year end (absent a hawkish shock), the Nomura strategist also presented what he thought are key hawkish and dovish triggers. As we noted in our own preview, consensus already expects “transitory” inflation references to be dropped in statement, and the doubling of Taper to $30BN/month to conclude mid-March, the economic projections to see higher PCE / lower Unemployment.
The wildcard will be the dots, which will be revised higher, but the question is how high: the market expects the 2022 median at 2 hikes, with additional 6 hikes through ’24; however, any upside in those dots is where any “hawkish surprise” could come, i.e. 2.5 hikes in ’22 or say 4 in ’23. Either of these would be interpreted as a hard negatives for stocks, especially continuing the downside momentum for “Secular Growth” Tech. Of course, the inverse is also true and if the dots shows less than 2 hikes in 2022, will be seen as dovish. Additionally, it the 2024 median dot rises from 1.75%, where it was before, that too will be viewed as quite hawkish.
One other possible wildcard – the Fed’s PCE forecast, which if printing at or above 2.7% will be a very hawkish signal while a print at 2.5% or below will be dovish.
So assuming Powell threads the needle without setting off any hawkish bombs, Charlie McElligott reminds us of an insightful “Fed Hiking Cycle” backtest which he has previously referenced, and where both on the 6 month trade heading into the first Fed hike (June ’22 as currently-priced “pivot point”), and 12m ‘out of’ the first hike, the market usually sees a pretty substantial “risk-ON” type trade.
So if we take the current market pricing for “liftoff” at June 2022 as the pivot point, the “6m returns INTO the first Fed hike” put us HERE in Dec / Jan and, on the median, is bullish from almost all slices—SPX, RTY, Value and Growth, and “Beta Factor Longs”:
And despite some choppiness looking-out 3m- and 6m- following that first hike, the Nomura strategist notes that the 12 month “coming out” is also strong for risk, particularly RTY, Value and EBITDA / EV (high beta Value):
Wed, 12/15/2021 – 13:31
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