You’ve heard it before: “Sell the last hike.”

That’s a familiar refrain for those who follow BofA’s Michael Hartnett. The thesis (i.e., fading equity rallies despite an imminent Fed pause and the prospect of easier policy down the road) is predicated in part on assumptions about a macro regime shift.

In short, buying equities at the end of the hiking cycle may not work in inflationary regimes.

On Monday, Morgan Stanley’s Mike Wilson underscored the point. “We find a significant difference in performance after peak rates depending on if inflation is elevated or not,” he wrote, noting that “in the late 1960s, 1970s and early 1980s when inflation was elevated, equity returns were negative three, six, nine and 12 months following peak rates.”

As the table makes clear, the difference between equity returns post-peak rates at the front-end is stark depending on inflation regimes.

When inflation isn’t elevated, stocks tend to rally 6% in the medium-term and 7.5% out a year, while in high inflation regimes, equities have a very difficult time, falling almost 18% on average over 12 months. The sample size is small, of course, but that’s unavoidable.

What accounts for the return disparity? Well, it’s simple. “In cycles with elevated inflation (like the one we are currently in), the Fed typically maintains restrictive policy later into the cycle because of sticky inflation pressures that persist,” Wilson explained. “In cycles where inflation is not historically elevated, the Fed is able to pivot earlier to a more accommodative stance (i.e., a pause and then rate cuts).”

As mentioned in the latest weekly+, December Fed pricing is at least two 25bps hikes too loose versus a Fed that wants to hold terminal given stubborn core inflation.