Monday, March 19, 2007

Must Stocks Rise Following a Cut in the Fed Funds Rate? / hussman

this is from William Hester / hussman. make sure you read the full piece (click headline) for this perfect "anti-spin" of the talk that a fed rate cut will lead to gains in the stock market.

einmal mehr extrem lesesnwertesaus dem hause hussman. William Hester zeigt hier sehr schön warum slbst zinssenkungen nicht immer zu kursgewinnen führen müssen. empfehle jedem die volle dosis "anti-spin" zu lesen. überschrift klicken.

The chart below shows the average 6-month, 12-month and 18-month returns (annualized) following a first-time cut by the Fed. The two sets of bars on the left show the returns during periods where price to peak earnings ratios were less than 15 and in periods where the yield curve was either upward sloping or inverted. The two sets of bars on the right show both yield curve environments, but during periods where the price to peak earnings ratio was greater than 17.

Segmenting the data by valuation quickly highlights the role that cheap markets play in affecting stock market returns. During periods where the S&P 500 price-to-peak-earnings multiple was less than 15, an initial rate cut was followed by annualized S&P 500 returns of 43.2% over 6 months, 26.1% over 12 months, and 25.4% over 18 months.

In contrast, rich valuations have produced far more tepid returns. When the S&P 500 price-to-peak-earnings ratio has been above 17, the market's annualized return following the initial rate cut was –2.3% over the following 6 months, 5.9% over the following 12 months, and 6.2% over the following 18 months. Though there are fewer occurrences of rate cuts at higher valuations, they're also more varied.

From low valuations, average stock market returns have been strong in both periods where the yield curve was upward sloping and where it was inverted. But overvalued markets have been more sensitive to economic growth expectations.

When the price to peak earnings ratio was above 17 and the yield curve was inverted, stocks suffered annualized losses of –6.9% over the following six months, -4.4 % over the following 12 months, and –9.3% over the following 18 months.

This includes the losses incurred during the 2000-2002 bear market, as well as the bear market beginning in 1968, where annualized returns were -0.5% over the following 12 months and –5% over 18 months. The chart above displays a basic fact of investing. Low valuations are more forgiving of whatever economic outcomes may occur.

The strongest stock market rallies after an initial interest rate cut have occurred during periods very different than today.

more from mish

but this fact will not be spread around wall street, the media etc, cnbc/cramer . they will play this "movie" in heavy rotation....

thanks to

zu dumm nur das man diese einschätzung die nächsten monaten sicher nicht von wall street oder den medien zu hören bekommt. dort wird dann wohl dieser film in endlosschleife aufgeführt....

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