Today, lets take a look at some statistics surrounding historic moves from high inflation to lower (not low) inflation and a softer economy. In the news today was a story noting some hints by Fed Chair Powell that hiking may be over – not unexpected. Typically, the Fed pauses once it sees evidence of falling inflation and weakness in the economy . Then, the easing cycle starts when recessionary pressures are already present. So don’t expect interest rates to decline right away.
With these facts in mind…
What is the average rate cut when it does happen?
A recession typically arrives fairly quickly after the end of the hiking cycle and the Fed responds by cutting rates by -500 basis points on average
Which sectors perform well after the Fed pauses and eventually cuts?
When the Fed takes a pause, the long-end of the Treasury curve and defensive or rate-sensitive equities perform well (Financials, Utilities, Real Estate), and staples. This, while many (not all) commodities and cyclical stocks underperform. Specifically Crude Oil, Gold, Copper. However base materials (fertilizer etc) can do well, along with energy such as nat gas etc.
Keep in mind my rules presented on the very important video I did last week (watch it here if you haven’t). One rule: Trade, trade, trade.
Chart below courtesy Rosenberg Research.
If commodities typically underperform during recessions, why trade commodities?
True enough, the seasonal trends for commodities are poor from October to year-end. The chart below displays the annual seasonal trend for the CRB Index.
Thereafter, seasonals are actually quite bullish–with oil being very strong from February to the spring. More importantly, I am a firm believer that stagflation – not just a normal recession, will be the game herein. Higher inflation and possibly maintaining current rates for longer. That’s bullish for commodities.
Given the state of geopolitics (bullish oil, see my last blog) and the continued concerns regarding “sticky” inflation, commodities seem poised for better than average returns than statistics suggest. Moreover, the longer termed cycle suggests a commodity bull market may have started 2 years ago.
On October 12th I warned you to watch that the test of the upper trend channel by the SPX did not fail. Well, kinda looks like it failed, doesn’t it? Chart below. This is NOT bullish for the markets, given that the failure suggests a continuation of the downtrend. I noted on that blog that we were going to hold off on buying stocks (aka continue to hold lots of cash) until this week to see if the bear channel broke out. It didn’t .We still hold our cash at ValueTrend.
Warning: Keep an eye out for a test of 4200. If that fails, this implies a major support level has been breached AND a a lower low to continue the downtrend. Like I have noted in prior blogs, we’re looking at 3800 if 4200 breaks. That has not happened yet! Not a prediction! Just telling you to keep your eye on the ball.