182: Navigating the Fed’s Last Hike & Its Market Impact

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

All right. Hey, welcome back to The Invested Dads Podcast. A podcast where we take you on a journey to better your financial future. I am Austin Wilson, Research Analyst at Hixon Zuercher Capital Management.

Josh Robb:

I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us with our podcast?

Austin Wilson:

We would love it if you’d subscribe if you’re not subscribed already, so hit that plus, follow icon, whatever that is on your podcast player, so that you get new episodes when they drop each and every Thursday. Visit our website, because on our website you can sign up for our weekly newsletter to get notified with a nice little summary and a nice link to listen to that episode. It’s exclusive on our website, so check that out. Today, your episode is coming in hot.

Josh Robb:

This is it.

Austin Wilson:

It’s coming in hot, because we’re going to be discussing the implications of the Fed likely having made its last hike of this hiking monetary cycle. Crazy tightening, we experience as opposed to easing or loosening of monetary policy, which they did during COVID. They’ve ramped it up, tightened it up, and right now we’re sitting at about 90% chance that it’s done. We’re no longer going to get any more hikes.

Josh Robb:

Yep.

 

[1:26] – Where The Fed Has Taken Us Vs. Where We Are Now

Austin Wilson:

What are the implications for the market there? I guess we should also point out the Fed is saying once they’re done, which is now-ish, they’re probably going to leave rates where they are through the end of the year. That’s kind of their plan.

Josh Robb:

That’s what they’re saying.

Austin Wilson:

As a matter of background nine hikes spanning everything from 0.25% or one quarter of a percent, 25 basis points, to 50, half a percent, to 75 many of those in a row.

Josh Robb:

Yep.

Austin Wilson:

Then back down to 50, back down to 25, is the way that they’ve done this path. Nine hikes from March of 2022 through May. We just got the last, hopefully, one May of 2023. It has been in the top two fastest monetary tightening cycles on record for the Federal Reserve…

Josh Robb:

Ever.

Austin Wilson:

… in the United States, ever.

Josh Robb:

Wow.

Austin Wilson:

Arguably, I would say the fastest if you look at it from a interest rate change comparison. In terms of where you’re starting, because we started at zero, essentially, or almost zero is the way the Fed would’ve seen it. If you look at the percent change on that almost zero number, it is an exponential increase.

Josh Robb:

It changed from zero. Yeah.

Austin Wilson:

No, it wasn’t. It was almost zero.

Josh Robb:

Yeah.

Austin Wilson:

Yeah.

Josh Robb:

Point, what? Point 25.

Austin Wilson:

But even if they increased…

Josh Robb:

Yes, you are right.

Austin Wilson:

… the same amount and interest rates were 8% or 5% at the beginning your percent change would’ve been a lot smaller.

Josh Robb:

Yep.

Austin Wilson:

I think it was a bigger shock to the system this time –

Josh Robb:

I could see that.

Austin Wilson:

– Then it has been. If you consider where we started, craziness, and that is fastest and hardest monetary tightening cycle ever. What did it do? It caused the bear market. It caused stocks and bonds to fall apart in 2022 and both have yet to recover,

Josh Robb:

Yep.

Austin Wilson:

… in 2023 thus far. It may, we’re not so sure about this, but it may be in the process of causing a recession. There are a lot of things that are pointing towards slowing down of an economy. Although as a first quarter GDP it was still positive, but slowing anyway. One thing we do know, and we’re going to talk about this a little bit later, is that the Federal Reserve usually does not stop early enough, and they usually break something, and cause some sort of recession.

 

[3:38] – The Fed Rate Hike Cycle is Done… What Now? 

Austin Wilson:

Now, I want to talk about what this means for the markets, because we’re in a weird position where, maybe, some uncertainty around the Fed hiking cycle is behind us, but how do markets typically fair when we get to this point? We’re going to break this down, but if we look at the last four Fed rate hike cycles the S&P 500 was sharply higher one year later after the last hike.

Josh Robb:

Yep.

Austin Wilson:

Three out of the last four times.

Josh Robb:

Okay.

Austin Wilson:

That’s pretty decent chances.

Josh Robb:

That’s good news.

Austin Wilson:

In other words, it generally didn’t pay to fight the Fed. However, what is the interesting thing here during the Dot-com Bubble…

Josh Robb:

Yep.

Austin Wilson:

… you had sharply lower returns a year later, after. That was the one time period where you had some pretty rough returns after.

Josh Robb:

Yep.

Austin Wilson:

That’s because-

Josh Robb:

A year later from when they ended…

Austin Wilson:

Yes.

Josh Robb:

… other things happened between that timeframe,

Austin Wilson:

Yes.

Josh Robb:

Too that could have been a factor outside of that.

Austin Wilson:

Yeah.

Josh Robb:

Yeah.

Austin Wilson:

This is purely looking at data.

Josh Robb:

Yeah. May 16th of 2000 there was turmoil that followed a year later from that.

Austin Wilson:

Yeah. Let’s break down briefly those four.

Josh Robb:

Yep.

Austin Wilson:

Those most recent four hiking cycles ending periods. One of them ended on February 1st, 1995. One year later the market was 30% higher. The next one ended on May 16th, 2000, so this is the Dot-com one, that one did go on for 10% further downside a year later for the markets. One ended on June 29th, 2006. That one had markets higher by nearly 20% over the next year. Then the one that ended on December 19th, 2018, I remember this one, markets they sold off sharply through the end of 2018. Almost to bear market in like a month and then a year later they were higher by 20%.

Josh Robb:

They were higher…

Austin Wilson:

It was crazy.

Josh Robb:

… four months later.

Austin Wilson:

Yeah.

Josh Robb:

Yeah.

Austin Wilson:

It was crazy. Three out of the last four, pretty impressive. One of them not so great. Okay.

Josh Robb:

Yeah.

Austin Wilson:

One notable fact is that this cycle has shown that actually the market going into this last hike has actually been down the most. If you look at the 12 months leading up to the last hike the market has been down the most of all of these.

Josh Robb:

Okay.

Austin Wilson:

We’re in a little bit different situation here, as in it’s been more painful, I think, due to the rate of change that we had talked about on the front end and it’s unknown as to what that’s going to lead to now.

Josh Robb:

Yep.

Austin Wilson:

There has been really one instance where the Fed has not caused a recession.

Josh Robb:

Soon to be the second.

Austin Wilson:

We’re hoping…

Josh Robb:

I’m going to be optimistic.

Austin Wilson:

We are hoping another one here.

Josh Robb:

I’m going to be optimistic here.

Austin Wilson:

Yeah. Mr. Optimism. 1994 and 1995.

Josh Robb:

Yep.

Austin Wilson:

That tightening cycle the Fed brought inflation down, but stopped before they broke the economy.

Josh Robb:

Oh, nice.

Austin Wilson:

That is the only example of the Fed hiking cycle not ending in a recession. Usually, these end in a recession. That’s, again, the only time.

Josh Robb:

Yeah.

Austin Wilson:

Their track record’s not so great.

Josh Robb:

Yep.

Austin Wilson:

It’s to be determined if they A) have gone far enough or B) gone too far. It’s unlikely you’re going to get A. This is not going to be like a Goldie Locks thing in most instances.

Josh Robb:

Yep.

Austin Wilson:

Okay. More often than not, like I said, Fed causes a recession in some cases it was really quick 1981, 2000, the economy in both those times fell into recession within a few months.

Josh Robb:

Of them stopping hiking.

Austin Wilson:

Yeah, exactly.

Josh Robb:

Okay.

Austin Wilson:

In a couple other cases, like ’89 and ’06 it took well over a year…

Josh Robb:

Okay.

Austin Wilson:

… for that to happen.

 

[7:01] – How Will the Stock Market React?

Austin Wilson:

Now, how does that correlate with stock market returns? It’s a little bit nuanced. The S&P 500 over a long period of time, now we’ve stepping back beyond the prior four…

Josh Robb:

Yep.

Austin Wilson:

… but over a longer period of time the S&P 500 has been lower most of the time that this happens.

Josh Robb:

Okay.

Austin Wilson:

Now, it has been, like I said, higher more recently, but lower over a longer period of time. If you look in the six-month period after the last hike, narrowing that a little bit more, on average over the long period, not just the last handful, the S&P 500 has actually been down 5.50%.

Josh Robb:

Post they’re stopping?

Austin Wilson:

Yep.

Josh Robb:

Okay.

Austin Wilson:

Again, it looks a little bit better, but we look a little bit further back it actually looks rougher.

Josh Robb:

Okay.

Austin Wilson:

One of the things that is a key thing to remember is that it’s a recession call that really matters. If we’re in a recession or heading into a recession imminently the market’s going to be selling off anyway.

Josh Robb:

Yeah.

Austin Wilson:

One thing that the market has really been thinking about a lot is the prospect of Fed cuts. The market’s pricing in Fed cuts later this year, second half of the year, a couple of them anyway through the end of the year. That sounds like a good thing for lower interest rates for really, stocks and bonds should benefit from that. It’s really not for the right reasons. It’s because of economic weakness and that is actually not going to be a good prospect for stocks. When the Fed actually cuts rates it’s because things look bad.

Josh Robb:

They’re doing it for a reason.

Austin Wilson:

The economy…

Josh Robb:

They’re cutting rates for a reason.

Austin Wilson:

Yeah. The economy sucks and that’s actually almost always really bad news for stocks. Don’t be banking on the Fed cutting, being a buoy for the stocks. If the Fed cuts, that’s actually, you got other things to worry about at that point.

What about stocks versus bonds after the last hike? Are bonds more attractive than stocks? Are stocks more attractive than bonds? If we look at all the last hikes since 1953 stocks have underperformed bonds six months after on average.

Josh Robb:

Okay.

Austin Wilson:

Now, even during the rising rate environment of the 60s, the 70s stocks were behind bonds in the six months after every single time.

Josh Robb:

All right.

Austin Wilson:

The interesting thing is that one year later we had very wide dispersions of returns. It’s really hard to pinpoint exactly what this is going to look like, because you’ve had stocks versus bonds having a difference of one outperformed the other by 10%, five times, and one underperformed the other by 10%, four times. Big number swings.

Josh Robb:

In other words, it wasn’t one or the other. There was a lot of times…

Austin Wilson:

It was mixed.

Josh Robb:

But, when they do…

Austin Wilson:

It was big.

Josh Robb:

… they outperformed by a decent amount.

Austin Wilson:

Absolutely.

Josh Robb:

One or the other, so you just have to guess it right.

Austin Wilson:

But, overall, stocks have outperformed bonds 8 out of the last 13 times.

Josh Robb:

Okay.

Austin Wilson:

Then, again, if we look a little bit more shortsighted here since 1989 stocks have outperformed in the immediate timeframe after that last hike. That is, again, the only example where things were really rough was 2000. Generally speaking, things have been pretty good since then.

Josh Robb:

Right.

Austin Wilson:

Long story short, the Fed hiking cycle’s over.

Josh Robb:

Yep.

Austin Wilson:

Probably. What does this mean? It means that historically speaking in the short-term we could have a period where the fed’s not hiking and the fed’s not cutting, so there’s some uncertainty off the table and you’re not getting big changes in interest rates, so that’s viewed as favorable.

Josh Robb:

Yep.

Austin Wilson:

You could have some tailwinds for stocks specifically to do okay. It’s a little bit more nuanced whether that stocks or bonds are outperforming in the short term, but you could have a short period here where stocks could actually perform okay.

 

[10:24] – Dad Joke of the Week

Josh Robb:

Okay. Got you.

Let’s pause and do a dad joke.

Austin Wilson:

Ooh, I like it.

Josh Robb:

We’ll swing back into this question on the rate height cycle and get on what’s going on with the markets.

Austin Wilson:

Yeah.

Josh Robb:

All right. Don’t know if you know this about me, but years ago I applied to an art school.

Austin Wilson:

Did you?

Josh Robb:

Yeah. My focus was going to be on origami. Yep. They sent me a rejection letter.

Austin Wilson:

Yeah.

Josh Robb:

I don’t know what to make of it.

Austin Wilson:

Don’t know what to make of it.

Josh Robb:

Because it’s origami.

Austin Wilson:

Yeah.

Have you ever tried to sit down and make origami?

Josh Robb:

Yeah.

Austin Wilson:

It’s stressful. There’s a lot of little folds.

Josh Robb:

Yes. But, I also could see that as one of those things where takes your mind off of other things, because you got to concentrate on this stuff.

Austin Wilson:

Oh yeah.

Josh Robb:

You’re not thinking about anything else. Similarly, I watch people doing other things where it’s intensive, but it’s also following directions. Right.

Austin Wilson:

Yeah.

Josh Robb:

To me, if I needed just a distraction that could be one.

Austin Wilson:

Right.

Josh Robb:

I would probably be super frustrated when it’s all done, ‘cause it wouldn’t look like the swan I was trying to make.

Austin Wilson:

I know I’ve tried to do those and I’m like, “This is not right.”

Josh Robb:

Yeah.

Austin Wilson:

“Something’s not right.”

Josh Robb:

I could see myself enjoying that. If I needed just a turn my mind off of everything else and focus on one thing that isn’t something I normally do.

Austin Wilson:

Yep. That’s what I do when I go out to the garage that’s my origami.

Josh Robb:

That’s what I was thinking. Building to me is what it’s.

Austin Wilson:

I’m going to break something probably. I’m going to bust the knuckle up, but I’m going to have something, one thing to focus on.

Josh Robb:

Yep. Building is what it is for me. That takes a lot of my concentration to work on that project, but… Yeah.

 

[11:46] – How the Market Environment Could Take Impact 

Austin Wilson:

Absolutely.

All right.

Let’s talk a little bit about why the market environment that we’re in could also have an impact on this.

Josh Robb:

Yep.

Austin Wilson:

Here’s some definitions. Secular Bull is really talking about a longer-term bull market without a sustained multi-year bear market drawdown in the middle.

Josh Robb:

Okay.

Austin Wilson:

Many would actually say that we’re still in a Secular Bull market and have been in since 2009. It’s a longer-term bull without a sustained drawdown. Secular Bears are multi-year bears being substantially below the all-time highs with no serious rebound. A lot like the time period. There’ve been multiples of these, but the most recent one would be Tech Bubble 2000 all the way through right before the global financial crisis. You pretty much had a lost decade.

Josh Robb:

Yeah.

Austin Wilson:

That’s a Secular Bear Market. Then you’ve got shorter term thinking. A Cyclical Bull market is a short-term bull market. This can be within a longer-term bear. You can have some multiple cyclical bulls. A lot of people use a 20% rally from a recent low or something like that for a short-term bull market there.

Josh Robb:

Yep.

Austin Wilson:

Then you can have a cyclical bear market and that’s a short term bear market. That can be within a longer term bull market. If we’re still in this longer term bull market we’re hoping that what we’re in now is a cyclical bear market. A short term one that’ll rebound to all time highs before too long. We also experienced one of those in COVID where we had arguably…

Josh Robb:

Couple months.

Austin Wilson:

Arguably the fastest rebound of all time, but that was definitely a bear market it just rebounded very quickly and did not stay down. Those are some definitions.

What we need to talk about is the tendency that after the final rate hikes in secular bull markets, like we think we are in right now, markets have actually had a tendency to rise. This is an interesting thinking where the Fed’s done. Markets should be, historically speaking, more likely in a secular bull market to continue some upward momentum from here, because the net optimism is out there.

Josh Robb:

Yep.

Austin Wilson:

Kind of the way to think about this. We’ve not been in this beat down bear market for years. We’ve been in it for a little while, but it hasn’t been super deep, and it hasn’t been super long yet the going on theme is upward. We’re still in a bull market over a longer term upward thinking, positive momentum should come in overtime there. That’s one thing to think about there.

Now, again, there can be puts and takes within this longer term thinking and if we retest the October lows, and even go lower, and stay down for a long period of time that secular bull that we think we’re in can turn into a secular bear. That would obviously be very bad for stocks, of course.

Josh Robb:

Right.

Austin Wilson:

Markets actually tend to fall after the fed rate hike if we’re in a secular bear market. We’re probably at that point in a secular bear market, because things are terrible in the economy.

Josh Robb:

Yeah.

Austin Wilson:

Something’s already broke.

Josh Robb:

Yep.

Austin Wilson:

It’s a Tech Bubble we had valuation issues, and unprofitable companies, and all kinds of crazy things going on, as well as other economic weakness at the same time. You had a double whammy of weakening economy, overvalued market causing years to catch up from that. The global financial crisis we had their own issues, as well. Now, that was the part of the secular bear market that we had been in, however, it took many years, but we still rebounded beyond that and got into it bull market from there. If we’re in those periods where optimism is not there, the market does not want to default up, we’re not in a longer term optimistic thinking, growing mindset as terms of the market that’s typically pretty poor for forward market returns.

Again, there’s a tipping point we’re at right now. If the market does not rebound somewhat soon we may threaten this longer term secular bull market that we’re in and actually cause further downward pressure and really some serious pessimism in the markets. That is going to be directly impacted if the Fed breaks something with their hiking cycle that is ending right now.

Again, as a reminder, we talked about earlier, the Fed may go too far. Historically speaking-

Josh Robb:

Historically they do.

Austin Wilson:

They do.

Josh Robb:

Yep.

Austin Wilson:

All except for one time. What is the reasoning behind this? They’re using a lot of lagging data for one to guide what they’re doing.

Josh Robb:

Economic data is lagging.

Austin Wilson:

Tons. Oh, of course.

Josh Robb:

It’s hard, because…

Austin Wilson:

You don’t know it’s happen.

Josh Robb:

… you’ve got to wait for the data to show up before you make a decision…

Austin Wilson:

By the time you get it it’s a month old.

Josh Robb:

… and the data’s a month old. Yeah.

Austin Wilson:

It’s like driving from the rear view mirror for to some extent, which is a little bit of a challenge that they have to face. That’s a tough part in this.

Josh Robb:

Unless you’re backing up, then you want to use a rear view mirror.

Austin Wilson:

Maybe, the Fed needs to go into reverse, but anyway.

Josh Robb:

You mentioned the secular bear in bull markets versus the cyclical, which are the short-term. Do you think we’re still in a secular bull market right now?

Austin Wilson:

I would say yes for now. Especially, if we’re still within 20% of the all time highs. If we dip below that and if we really test last October lows or even pre COVID highs that would be really bad. I would start feeling like there may be some years before we recover from that. Also, the economy is key here. That secular bull is going to be threatened by a serious recession. If the recession is serious, because most people, and I would say that myself included here, would say a recession is coming. At some point, maybe, it’s later this year, maybe it’s next year. Who knows. If the recession is serious, if it’s deep, if there’s a bunch of unemployment, and all of this stuff we are going to have a serious issue for stocks, which I would say would cause potentially a break in the secular bull market to turn into a secular bear. Could take some time to recover. Even if we get a recession if it’s relatively mild, I don’t actually don’t think that has to break.

Josh Robb:

Okay.

Austin Wilson:

I think, that that’s kind of what the Fed hopes for. They’re not saying it. They’re saying that the recession is not their base case. However, I think in their minds they’re like, “Hey…

Josh Robb:

“That might happen.”

Austin Wilson:

“… if we have a mild recession it’s not the end of the world. We have 3.4% unemployment. How bad can it really get?” That’s where I think we are right now, but the real question, Josh, that I want your opinion on…

Josh Robb:

Yeah.

 

[17:59] – How Does This Impact Your Financial Plan? 

Austin Wilson:

… is, we got our last hike. We’re in a little bit of an unknown period. We don’t really know what’s happening economically for certain. We know it’s not terrible, but it’s not great in certain areas. We know markets still have not recovered. How does this impact your financial plan?

Josh Robb:

Yeah. Mine personally?

Austin Wilson:

Yours personally.

Josh Robb:

Yeah. When I’m talking to clients this question is asked a lot, right? With everything going on what do I need to do to change? Do I need to adjust my plan? Usually, the answer is no. The overall plan, especially when we’re talking long-term planning is you should expect and anticipate multiple movement in the market up and down along through your plan, as well as you’re going to get some recessions. Recessions happen as part of our economic cycle to see them every six or seven years. You get these slowdowns and these movements within an economic pattern are normal. Should you change your plan because we got a normal occurrence within a longer term? No.

Austin Wilson:

Right.

Josh Robb:

You really shouldn’t. Can you do things differently during that time? For sure. If the markets are going down one of the best things you can do is increase your contributions during that timeframe.

Austin Wilson:

Yep.

Josh Robb:

If you need to tighten your budget or if you’re on the other end of withdrawals maybe adjust your withdrawals when your portfolio’s down. Overall, it really shouldn’t factor into your plan. Your plan should have a long term thought process that has been tested that through these economic cycles it doesn’t impact the overall success. That’s really what a good plan looks like.

Austin Wilson:

If you have questions about what is happening this is a great time to talk to your advisor.

Josh Robb:

Oh, yeah.

Austin Wilson:

They’ll be able to say, “Hey, either A) here’s an opportunity to take advantage of right now. Or B) we built this into your plan. We did Monte Carlo simulation with a thousand different options of where the way this could go.”

Josh Robb:

“We already simulated movement.”

Austin Wilson:

“We’re doing better than the worst case there.”

Josh Robb:

I will say there are certain situations where you may need to tweak your plan. For instance, if you were hoping to retire and the market is down if you have that flexibility and desire, maybe, waiting a year or two and working is great.

Austin Wilson:

Right.

Josh Robb:

If you have that flexibility and freedom. Doesn’t mean you have to, but it just may improve your results.

Austin Wilson:

Yep.

Josh Robb:

There are times, depending on what you’re doing, where it’s worth looking at it. There’s nothing wrong with asking that question, but more often than not, the answer usually is “Stick with the plan. This doesn’t impact what you’re trying to do.”

Austin Wilson:

That’s what I would say.

Josh Robb:

Yeah.

Austin Wilson:

Stick to the plan, man.

All right. Well, thank you for listening. Hopefully, this was able to give you some peace that, “Hey, it’s going to be all right. Stick to the plan.” We do have some uncertainty out there.

Josh Robb:

Yep.

Austin Wilson:

We don’t necessarily know day-to-day what the market’s going to do in the short term, but over the long term we know that stocks rise, because people spend money and earnings rise. Right?

Josh Robb:

That’s right.

Austin Wilson:

That’s what we know over the long-term but thank you again for being here today. Hopefully you’ll learn something. If you know someone who is asking about some of this discussion share this episode with them. We’d love it if you do that. Always remember we’d love it if you’d subscribe or leave us a review on Apple Podcast or Spotify and check out our social media accounts on Instagram, Twitter, Facebook. Say hello. We’d love to see you there.

Josh Robb:

That’s right. Talk to you later.

Austin Wilson:

Until next Thursday, bye.

Thank you for listening to the Invested Dads podcast. This episode has ended, but your journey towards a better financial future doesn’t have to head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life leave us a review, click subscribe, and don’t miss the next episode.

Josh Robb and Austin Wilson Work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon. Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon and Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.