In many respects 2014 is shaping up similar to 1994 and 2004. In those years the economy finally started to gather momentum several years after the end of a recession and the Federal Reserve began moving towards a tighter monetary policy. Before then, Fed Chairman Alan Greenspan continued to cut interest rates into late 1992 – even though the recession ended in 1991 – and then held rates in check at 3% from 1992 to early 1994. It was only after three years of a weak recovery before Greenspan felt the economy was strong enough to hike interest rates.
The markets took some getting used to higher rates and from February 1994 to February 1995 the S&P 500 was rather choppy, witnessing nearly a 10% correction in early 1994.
Similar to the 1994 experience, Greenspan held rates in check after the 2001 recession ended and it wasn’t until years later in 2004 before he began to raise interest rates as the economy was slow to recover. Like 1994, stocks made little progress in 2004 as investors had to transition from a high monetary stimulus and low growth environment to a higher growth and less monetary stimulus backdrop. From February 2004 to November of that year, stocks traded flat but like 1994 saw some choppy action and witnessed a 9% pullback during the middle of the year.
Fast forward another decade and the U. S. is again slowly recovering after the end of a recession, aided this time by several rounds of quantitative easing (QE) with the most recent ending this month. Also, we have the prospect of the first Fed rate hike since 2006 forecasted to take place in 2015. Similar to 1994 and 2004, the stock market has made little progress this year as investors grapple with an improving economy and a less accommodative Fed.
This post was published at FinancialSense on 10/24/2014.
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