Equity trading screens present a sea of red. Heads might be full of painful reminiscences. The US earnings season may well be truly awful. But Teun Draaisma, the Morgan Stanley super bull, is calm. The coming equity nirvana has only just and so arrived. Now is not the time to sell.
On Monday Teun and team dispatched a new analysis to MS clients, focusing on periods of Fed easing, from the first cut to the first subsequent hike. Says Draaisma:
Valuations aside, we conclude that history teaches us that if you believe in a mid-cycle slowdown rather than recession scenario, like we do, that equities do well until the next Fed rate hike comes through, while equities struggle more after that. Where it could be different this time, is that the Fed under its new chairman may wish to increase rates sooner than what we have gotten used to, and that the next Fed rate hike would be an even more important turning point than usual. Our US economists expect 2 more 25 bps cuts by the Fed, one this quarter, one next. They expect the first subsequent hike in 2009.
Some snaps:
- Of the 16 periods of Fed easing since 1972, rates were cut more than once on 15 of these occasions. “Average size of first cut is 60 bp, average cumulative size of cuts is 290 bp.”
- Average duration of easing period is 13 months, ranging from less than 2 months (July-Aug 1987) to 56 months (1989-1994).
- Downgrades and slowing growth is the norm during periods of Fed easing.
- MSCI Europe has on average been up 17%, and down only twice during these periods of easing.
Conclusion? Wait for the next Fed hike before you sell. But then be quick about it. This Bernanke character might prove quick on the trigger.