Many investors are eagerly awaiting a Fed pivot because they believe it will cause stocks to rise.
The data—and history—says otherwise, however. (Note: A “Fed Pivot” refers to when the Federal Reserve reverses its existing monetary policy stance.)
Research from Michael A. Gayed, an award-winning financial analyst and editor of The Lead-Lag Report, demonstrates that a Fed pivot is usually followed by a drop in the S&P 500.
Building on this research, Darius Dale, founder and CEO of 42 Macro, analyzed the events that lead to bear markets. In this 2-minute clip, Dale presents data going all the way back to 1929. He found that during bear markets, Fed pivots have typically caused stocks to bottom.
Spoiler alert: the Fed hasn’t pivoted yet.
Therefore, it’s highly likely that we’re still in a bear market, and stocks will drop again.
A Fed pivot is an admission that the economy is struggling.
The data that Gayed and Dale presented isn’t just convincing form a historical standpoint. Their conclusions make logical sense as well.
The Fed raises rates when it believes the economy is running too hot. It pivots when conditions have changed to such a degree that it can no longer maintain its existing monetary policy.
In other words, the Fed isn’t going to pivot until economic conditions worsen.
The problem is that that Fed’s decisions are based on lagging data. By the time it interprets that information and makes a policy decision, the economy, stock market, consumers, businesses, and just about everything else has already changed.
This means that when the Fed pivots, it’s already too late. That’s why markets tend to bottom shortly afterward.
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