30% & Counting
Some noteworthy observations to share; please refer to the chart below which captures the past 30 years (S&P 500, Recession, Fed Funds).
The Fed only eases when recession is near, usually starting its cycle to ease just as economic conditions weaken, just prior to the official onset of recession. Prior to recession equities historically have set record highs.
Prior to recession, the Fed has hiked it Funds rate several times in the 1–2-year period that precedes recession. When the Fed historically began its easing cycle, equity market embarked upon a huge rally.
Over the past 8 months, the S&P 500 has rallied +30% as the Fed signaled an easing in financial conditions in October 2023. It is highly unusual for the Fed to cut its FF rate with employment/economic growth strong & equites at all-time highs.
S&P 500 earnings appear full at 20.5x; forward earnings growing at 10%+ results in 18x P/E, which is reasonable.
Fed Funds are high, but if the Fed eases prematurely, concern is that inflation will re-surge with animal spirits that creates more demand for good/services. The Fed has eased shortly after equities made all-time highs, but only when the economy entered recession.
Question of the Day: Can the Fed start an easing cycle with employment/economic growth so strong & U.S. equites making all-time highs?