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The Mid-90s Playbook That May Work Again

My full-time career on Wall Street started twenty-nine years ago, in June 1995. My first job was to enter the analyst training program at Lehman Brothers. Since I didn't have any money, I asked them if I could start early, and they let me…

The mid-1990s were an exciting time in the economy and stock market. There were many similarities to the world we live in today.

One of those similarities is between the initial excitement about the Internet and the recent excitement about artificial intelligence.

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The biggest internet IPO was for internet browser Netscape in August of 1995. I remember that day vividly and the excitement around that IPO. We will write about it in another issue of HX Daily later this week.

This past week, we saw the first actual volatility in the stock market. The media blamed it on comments about interest rates. We are not sure we agree, but it reminded us of the similarities between the period when I started my career and the environment where we are now.

Back then, the Federal Reserve had engaged in a series of interest rate hikes to cool a strong economy.

Here is a chart of the target “Fed Funds Rate” from that period…

Remember, this is the rate set by our Central Bank, which allows other banks to lend funds. Higher rates make money more “expensive” and should slow business activity.

You can see in the chart that they raised rates quickly. The Fed Funds Rate doubled from 3% in early 1994 to 6% a little more than a year later.

The stock market didn’t react well to rising rates. Here is a chart of the S&P 500 from that same period…

Looking back at S&P 500 returns, 1994 was one of the few years it posted a negative return. It was down -1.54% that year.

That isn't a terrible return, but it was only one of two down years since 1981.

This looks like our recent economy and stock market. Here are the same charts for the most recent period…

In 2022, interest rates increased significantly – from 0% to 5.5%. The S&P 500 also did much worse, posting a -19.4% return. This was the worst year since 2008 during the Global Financial Crisis…

What we find most interesting about all of this is what happened NEXT back in the mid-1990s.

After raising rates quickly across 1994, the Federal Reserve paused the rate increases. They lowered rates several times in 1995, with a final small cut in January 1996.

They then did nothing for almost a year before a slight rate increase in 1997 and then again not being active.

We mention this because we think our current period could look similar.

Since the start of 2024, the market prediction of potential Fed Funds rate cuts has gone from as many as seven to just a couple now. This week, the stock market sold off because of some comments from one of the governors of the Federal Reserve that indicated that there might be only one rate cut.

Honestly, we don’t know how it plays out. We are not sure whether there will be five rate cuts, two rate cuts, or NO rate cuts.

The critical part is that we don't think it matters for the stock market.

Go back and look at that stock market chart from the mid-1990s.

After posting a +34% return in 1995 as the rate hikes ceased and the rate cuts began, the S&P 500 posted another positive return of +20% in 1996.

What happened once the Fed started raising rates again?

The stock market did even better! The S&P 500 was 31% in 1997.

Don’t even get us started about what happened after that as we entered the peak of the Internet 1.0 bubble.

Our view is that if the Fed is not RAISING rates or more importantly raising them a lot – then it won’t matter for the stock market.

This doesn’t mean that the stock market can’t go down, but we don’t think that the actions of the Federal Reserve and interest rates would be the reason it would fall. Just like back when our career started…

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