God knows there’s been no shortage of analysis regarding “days without a [fill in random percentage drop] pullback” for stocks.
Equity resilience is the market’s soup du jour and if there were an overused French food service industry term for “of the month“, then that would apply too.
As we move ever closer to what is now a fully priced March hike, the two questions on everyone’s mind are: 1) should we interpret rising rates as a sign that the reflation narrative lives and thus a reason to stay long risk until 10s breach the 3% threshold beyond which a tantrum redux becomes likely?, and/or 2) should we interpret policy normalization as predictive of a rapid tightening of financial conditions and thus a negative for an equity market that’s already pushing the limits in terms of valuations?
Every trader will have to answer those questions for him/herself, but as you ponder the outlook, consider the following visual and accompanying color from BofAML, whose analysts note that “after 62 weeks, the present cycle has had the fewest corrections (six times) relative to other hiking cycles.”
After 62 weeks, the present cycle has had the fewest corrections (six times) relative to other hiking cycles (Chart 3). By contrast, the equity market was turbulent during the 1999-2000 hiking cycle with 14 weekly corrections of at least 1.5% in 52 weeks. While the present cycle started out rough, with three corrections out of the first seven weeks after December 2015, the equity market has grown more comfortable over time. Since then, the present cycle experienced a similar in number of SPX corrections to the `94 and `04 cycles than the `99 cycle. In fact, we are in the smoother part of the road according to history; market corrections were more often at the beginning than in the middle of the cycle as the equity market aligns its expectations.
Note that this dovetails with the discussion about how equities usually react to bear flattening and to the stark contrast between financial conditions now and financial conditions this time last year (i.e. post-“liftoff”).