Fed officials would prefer it if you’d countenance another 25bps rate hike — one for the road, so to speak.

The events of the past several weeks made it clear that “this time” most assuredly wasn’t “different” when it comes to Fed hiking cycles ending in breakage.

To be sure, plenty broke last year as a direct result of rapid Fed tightening, but US bank failures were a clear indication that financial stability is now at stake. The Fed claims it can fight inflation and guard against systemic risk simultaneously, but that’s at least a bit disingenuous, as discussed here on Saturday morning.

A final hike at the May meeting isn’t a foregone conclusion. The market has it at a coin toss.

Even if the Fed goes through with one more hike, that’ll probably be it. It’s possible hikes could resume at some point in a worst-case scenario where inflation re-accelerates, but barring another run of very hot data, a pause in June seems very likely.

One way or another, we’ll need to ponder the outlook for stocks following the “last hike” sometime relatively soon. The final hike should bode well for equities if past is precedent.

“US equities have generally rallied in the months following the end of Fed tightening cycles,” Goldman’s David Kostin said. “In the three months following the peak Fed funds rate, the S&P 500 has returned an average of +8%, ranging from +14% to -1% and rising in five of six episodes,” he wrote, in a late Friday note. “On a 12-month basis, the S&P 500 has returned an average of 19%, rising in five of six episodes and rallying by more than 10% in each of those.”

The right figure is familiar to anyone who’s been through this (somewhat rote) exercise during past cycles. The figure on the left gives you a sense of how anomalous this cycle was in the context of post-Volcker tightening episodes.

For what it’s worth, Goldman still expects the last hike in June. In the wake of the SVB collapse, the bank suggested the Fed might pause at the March meeting. They didn’t, of course.

There’s some debate (I think it’s more apt to call it confusion, and it’s obvious from the wording of Kostin’s analysis that Goldman is aware of the nuance) about how best to discuss post-“last hike” equity performance in the context of previous inflationary periods. All I’ll say is that if you’re going to make comparisons across time, you really need to account for the evolution of policymaking and the technicalities and specifics of how it was conducted decades ago versus today.

As Kostin wrote, nodding to that nuance, “Although our analysis since 1982 focuses on changes to the Fed’s target interest rate, equities also generally rallied when Fed policy pivots caused the effective Fed funds rate to peak in prior cycles.”

The discerning among you might point out that Goldman’s house call on the S&P doesn’t line up with the average historical return for stocks following the last hike. Kostin readily acknowledged as much.

“Our baseline year-end S&P 500 forecast of 4,000 represents no upside from today, in what would be a break with the historical pattern at the end of hiking cycles,” he said. “While precedent suggests upside risk to our forecast for a flat equity market, we believe valuations and earnings each face specific headwinds in 2023 that will prevent near-term returns from being as strong as usual at the end of previous tightening cycles.”