Last year at this time markets were grappling with the Fed’s first rate hike in almost a decade. Although many optimists were confident the economy was plenty strong enough to handle the increase in rates, within days it was obvious they were sorely mistaken.
Fast forward to today. With the election of Trump, there is even more optimism filling the air.
Don’t get me wrong, I understand all the reasons to be bullish.
But doesn’t the fact that everyone else understands all those reasons too not worry you just a little bit?
There is no wall of worry to climb. Instead, we are faced with complete and overwhelming confidence the Fed hike will not derail the good times.
Now maybe I worry too much. Maybe the Fed hike will not slow down the markets even in the slightest.
Yet a little part of me wonders if the problems with the shortage of US liquidity will come rushing back to the forefront with the Fed hike.
And just in case it does, I think it is instructive to review what happened last year when the Fed hiked.
Let’s start with the S&P 500:
After last year’s Fed hike the S&P 500 managed to stay bid for a week before collapsing in the worst start to a new year in the history of finance.
How about the US dollar?
Although the US dollar went up for a few weeks after, it eventually rolled over and had a terrible first quarter of 2016.
So far all the reactions to the Fed hike seem to have some delay. Yet have a look at gold. The “pet rock” bottomed on the day after last year’s Fed hike and never looked back.