If we believe the Fed is done tightening, we can go back in history and study prior cycles to discern the potential paths for equities and the 10 year bond. The chart below shows every tightening cycle since 1953. Several points can be highlighted: first, the typical response for the 10 year bond is to go down in yield, but the bond yield has gone up 35% of the times. Second, corporate earnings decrease, sometimes abruptly, with the exception of soft landings. Third, equity markets follow earnings, which typically go down, and when they do, the Fed can be very aggressive cutting rates, and that can be a great catalyst for the turnoaround. So far, the pattern for the 10 year is similar to 1981, where the Fed end up cutting 550 bps, but on that instance there was an earnings recession, and that hasn’t happened yet in the current cycle. Current expections are perhaps too optimistic for the actual ecomic context.
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Chart source: Jurrien Timmer
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