Hikes are no problem
Two of Wall Street’s most pressing concerns do not hold up against history.
Since 1982, the S&P 500 has actually performed better after rate hikes compared to rate cuts, according to Charlie Bilello of Creative Planning.
Historically after a hike, like the one the central bank delivered last week, stocks have gained 14.9% on average the following 12 months whereas after a cut, the average one-year return is 11.2%.
That runs counter to the belief that lower borrowing costs are always better for asset prices.
This makes sense intuitively.
The Fed tends to raise rates when the economy is strong enough to handle it, and that typically means earnings are growing and consumers are still spending. Cuts on other hand are often made in response to economic trouble, like flashing recession signals or a banking scare.
In effect, the Fed’s interest rate decisions reflect where the economy is already rather than determine where it’s going next.
That same thinking applies to buying stocks at all-time highs.
Dating back to 1950, buying the S&P 500 at a record has produced an average one-year return of 9.5%, according to FactSet.
That’s slightly higher than the 9.3% average seen on buying during all other days.
That edge holds across three- and five-year time horizons.
Chart courtesy of Exhibit A
Again, this is a more intuitive data point than most investors realize.
Records tend to arrive in bunches because momentum drives markets.
A new high usually means earnings are moving in the right direction, and rarely do they signal the end of a bull market.
That the market today is coming off both a rate hike and a record high, then, should not be a reason to suddenly turn bearish on the year ahead.
History shows that, at least in a vacuum, these two happenings are actually bullish, and weak reasons to rush to the sidelines.
Elsewhere
📉 Nvidia is trading at its cheapest valuation in over a decade. Shares fetch less than 17 times forward earnings and are up just 22% this year, making Nvidia the fifth-worst performer in a chip index that has gained almost 76%. (Bloomberg)
🛢 President Trump is weighing a ban on US diesel exports. Treasury Secretary Scott Bessent said the administration is examining whether a full or partial ban is feasible as diesel hits a record $6.53 a gallon. (CNBC)
🏦 Paramount is about to launch a $49 billion debt sale to fund its Warner Bros. Discovery takeover. Bankers plan to sell about $30 billion of investment-grade bonds, $7.5 billion of loans and roughly $12 billion of second-lien bonds after the company settled lawsuits that held up the $110 billion deal. (Bloomberg)
Full Signal
Sonali Basak is the chief investment strategist for iCapital.
She joined me live at Future Proof in California for a live taping of Full Signal to cover the best opportunities in the market right now, hyperscalers tapping debt markets, and parsing through the AI doomsday headlines.
Tune in on Spotify, Apple Podcasts, or YouTube.
Rapid-fire
President Trump's July disclosure shows more than 1100 trades including big Microsoft and Amazon sales (CNBC)
How I use the AI tool Silvia to track my portfolio and pick stocks (Blog)
Cisco fell 5% after Piper Sandler cut its price target on concerns on industry growth (CNBC)
Richmond Fed’s Barkin left the door open to more rate hikes (Yahoo Finance)
Qualcomm launched a new Android chip built for AI (CNBC)
US regulators are rushing to write crypto rules after the Clarity Act stalled in the Senate (CNBC)
The AI trade continues to diverge on chips and software (Silvia Insights)
On this day
🗓 September 23, 2022: UK Chancellor Kwasi Kwarteng unveiled the "mini-budget" of unfunded tax cuts, triggering a historic collapse in sterling and gilts and ultimately pushing the Bank of England into emergency bond-buying.
Last thing
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