History Doesn’t Always Repeat Itself but Sometimes it Rhymes

Way back in the spring of 2013, then Federal Reserve Chairman Ben Bernanke announced that the Fed bond buying program would come to an end. A global bond market panic ensued, interest rates moved sharply higher and ALL investment asset classes fell. There was no place to hide – stocks, bonds, commodities, real estate etc. were all marked down sharply over a one-month period. . .

. . .and then everything was ok. In fact, it was better than ok. Actually, it was great. Subsequent to the Spring of 2013 Taper Tantrum, markets went on a tear with the S&P 500 rising nearly 25% over the next 12 months. To some degree, all asset classes followed suit.

The reasoning behind the rapid reversal of the market panic was simply that investors realized quickly the Fed’s decision to begin the end of quantitative easing and allow interest rates to rise was because the financial crisis was behind us, the US economy was coming to life and that a “normalization” of interest rates was a good thing and should be welcomed by market participants.

Ultimately, as is always the case, markets faced other challenges yet the need for extraordinary measures by Central Banks to prop up economies was largely complete by the end of 2013.

Today, it appears as if markets are again worried by the potential impact of a less accommodative Federal Reserve, this time through the more normal mechanism of tightening monetary policy by raising the Fed Funds target rate. Federal Reserve Chairman Jay Powell and other Fed Governors have indicated a greater comfort in raising rates given the economy’s strong performance over the past several years; indeed, this very gradual tightening cycle began in 2015.

So, is this the end of the bull market or will we experience yet another rebound from this current market sell-off? We believe a rebound is more likely than not as the economy continues to grow and inflationary pressures have remained well under control (just look at the 30-year Treasury rate for confirmation). To the extent the current economic framework remains in place, the anticipated Federal Reserve rate increases should not crimp economic or profit growth and markets should remain constructive for investors.

After a very strong third quarter, the market was due for a correction and, as always, there are economic variables to monitor and evaluate. Yet in isolation a change in the interest rate environment driven by tightening by the Federal Reserve does not alter our otherwise bullish viewpoint.

David Cleary, CFA is the President and Chief Investment Officer at Timber Point Capital Management, LLC. Prior to founding TPCM, David served as the Chief Investment Officer at Crow Point Partners. Before Crow Point, Mr. Cleary spent 23 years at Lazard Asset Management where he held a series of senior portfolio management roles over multi-asset and global fixed income strategies. Additionally, he served as the firm’s global head of fixed income, a $26 billion platform. Prior to Lazard, David worked at UBS and IBJ Schroder, mostly in fixed income asset management roles. He began working in the asset management field in 1987 upon his graduation from Cornell University, with a BS in Business Management and Applied Economics. Mr. Cleary holds a Chartered Financial Analyst (CFA) designation.

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