Down 1.33% on the trading day
The stronger than expected US jobs report, has the stock market traders concerned that the Fed might start the next phase of the monetary stimulus unwind sooner rather than later.. The expectations in the market are starting to shift to a Fed tightening as early as June. The FOMC meets again on March 18th at which time, the Fed is likely to strike any reference toward "patience" from the text. That would leave the door open for a tightening as soon as June (subject to data of course).
The last time the Fed tightened from such a low level was back in June of 2004. At that time, they increased rates from 1% to 1.25% as the first step (rates are now at 0-to 0.25% of course). In the March meeting of that year, the Fed commented that the Fed "could be patient in removing its policy accommodation". At the next meeting in May, the committee said that "it believes that policy accommodation can be removed at a pace that is likely to be measured".
At the next meeting in June is when they tightened by 0.25% and said that "with underlying inflation still expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured"
For the next 17 consecutive meetings, they raised by 25 basis points. It was not until the January 2006 meeting that they took out the word "measured" from the statement and replaced it with "further policy firming may" be needed. The tightening continued until August of 2006, when the Fed finally paused after the rate reached 5.25%.
Overall, the tightening took the rate up from 1% to 5.25% and that covered 17 consecutive meetings.
What did the stock market do over that time period? Surely it was trashed.
Looking at the chart below, the initial move was to the downside. The S&P fell by around 5.75%, bottoming in mid August 2004 - two months after the first tightening. From that point - over the next two years, the S&P index rose from 1061.77 to 1327.33 or 25.08%.
There were corrections along the way of -7.56% and -6.23%. The largest correction occurred toward the end of the tightening cycle when there was an -8.09% decline (see chart below). The rallies - between the corrections - saw the price move up 15.88%, 9.66% and 13.57%. Those are some nice moves to trade.
The decline in the stock market today is of course a concern and it can go lower still. As a guide, should the price move to the 200 day MA at around the 2000.00 level for the S&P (see chart below), that would be a 5.72% decline from the peak. What was the decline after the first tightening back in 2004? Around 5.74%. Same/Same.
The bigger picture point is this....
The Fed will likely raise rates. Rates can and should not stay at 0% forever. It is nice while it lasted but it is not forever.
Is the stock market overvalued today? By most measures, it is not out of this world overvalued. There may be pockets of concern but most pundits I hear, it is not.
So does Fed tightening have to mean the stock market falls out of bed?
Not necessarily. If history repeats itself (and there is no guarantee of that), there can still be some healthy gains even if the Fed were to raise rates for a period of time. Remember as well, that the Fed has said it does not expect the rate rise to approach the moves of the past. So if the rates went from 1% to 5.25% or 4.25%, it might only be 2.5% -3% that the Fed would have to raise in this cycle.
In addition the Fed might not be on a "every meeting" schedule.
Is there a word other than "measured" they might use to communicate that?
Time will tell, but it seems that getting too worried about the stock market because of tightenings, might not be all that warranted.