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Stocks were signaling fear in the markets that the Fed had already gone too far (i.e. was choking-off economic momentum). The Fed ignored the signals and mechanically raised rates again at their December meeting.
The bottom fell out in stocks. By December 26th, the S&P 500 was down 18% for the month of December. That led to a response from the U.S. Treasury (i.e. intervention). Mnuchin (Treasury Secretary) called out to major banks and the President's Working Group on Financial Markets (which includes the Fed) to "coordinate efforts to assure normal market operations."
That was the turning point. That put a bottom in stocks.
Within days of that, the three most powerful central bankers of the past ten years (Bernanke, Yellen and Powell) were backtracking on the Fed's rate path — signaling a pause. Stocks rose 47% over the next 15 months.
Let's continue moving left on my S&P returns chart above …
In 2015, once again, it was the Fed. By mid August, China's stock market had boomed and crashed, all in 2015. The Chinese economy was slowing and in August they surprised the world with a currency devaluation.
Meanwhile, the Fed had ended QE a little less than a year earlier, and the Fed had well telegraphed its first post-Great Financial Crisis rate hike for the following month (September), however there was plenty of global angst surrounding the removal of liquidity by the Fed.
In August, U.S. stocks crashed 13% in six days (including a 7% flash crash).
The Fed responded two days later (August 26). The New York Fed governor spoke at Jackson Hole and cited the market turbulence for marking a September rate hike unlikely. From the lows that day, stocks bounced 9% in fifteen days, and ultimately 14% from those lows.
If we continue moving left on the S&P returns chart (above) we see the other rare 5%+ two-day moves in the S&P futures.
They come (far left on the chart) surrounding massive monetary and fiscal policy intervention to avert disaster from the Lehman failure/Global Financial Crisis.
It was the Fed launching QE, and G20 global central banks vowing to coordinate policy, that solidified the bottom for stocks (in March of 2009).
With all of the above in mind, as we've discussed this week, major turning points in markets have often been the result of some form of intervention (i.e. policy action or adjustment).
We can see it in the examples above. And based on this history, it's fair to say that we are at a significant moment, seeing significant vulnerabilities in the financial system (driven by rising rates), and we've seen a significant response (by the Bank of England).
Will there be more intervention? Maybe. But we know that interest rate markets have reached the "uncle point," and central banks are on high alert, and will do whatever it takes to preserve financial stability. And these moments are, historically, turning points for markets.
Best,
Bryan
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