This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession
Back on June 17, Bank of America started its 66-day countdown to the moment it was convinced the Fed would hike rates, September 17, 2015. We, correctly, said that “we disagree entirely” with BofA’s conclusion that the Fed would hike rates, and sure enough, it did not after the Chinese August devaluation unleashed the ETFlash crash, the EM debt rout, a surge in the VIX and a correction in the S&P500, which crushed the Fed’s carefully laid rate-hike plans.
But while we disagreed with BofA’s countdown timing, we agreed with something its strategist Michael Hartnett said, namely that “gradual or otherwise, the first interest rate hike by the Fed since June 2006 marks a major inflection point for financial markets.”
BofA then laid out several key factors why “this time is indeed different” when evaluating the global economy’s receptiveness to a rate hike:
- Central banks now own over $22 trillion of financial assets, a figure that exceeds the annual GDP of US & Japan
- Central banks have cut interest rates more than 600 times since Lehman, a rate cut once every three 3 trading days
- Central bank financial repression created over $6 trillion of negatively-yielding global government bonds
- 45% of all government bonds in the world currently yield <1% (that’s $17.4 trillion of bond issues outstanding)
- US corporate high grade bond issuance as a % of GDP has doubled to almost 30% since the introduction of ZIRP
- US small cap 5-year rolling returns hit 30-year highs (28%) in recent quarters
- The US equity bull market is now in the 3rd longest ever
- 83% of global equity markets are currently supported by zero rate policies
However, to the Fed none of these matter: only the price action of the S&P500 does, which as everyone knows, is trading just shy of its all time highs so “all must be well.”
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