Source: FactSet
Tony Dwyer of Canaccord Genuity is the most vocal articulator of this analogy, which is probably the most bullish analogy available, given the S&P 500 levitated in 1995 by 35 percent without even a 5 percent pullback. His case: In 1994, the Fed boosted short-term rates aggressively to head off inflation, lifting the Federal funds rate from 3 percent to six percent by early 1995. At the time, economists thought unemployment dipping below 6 percent was an inflation threat, and it got there. The Treasury yield curve went completely flat (2- and 10-year yields about equal). Stocks were sideways that year but small-caps had a bear market and bank shares tanked – a “stealth bear market” in some respects.
By early 1995, the U.S. economy was clearly slowing. Fed Chair Alan Greenspan signaled he was likely through tightening, and in fact by summer the Fed cut rates as GDP growth slipped toward 1 percent for a quarter. By then, stocks got the message: a productivity boom was kicking in, growth resumed without much inflation, volatility collapsed.
In a speech last summer, current Fed Chair Jerome Powell explicitly and admiringly evoked Greenspan’s intellectual flexibility in letting the economy run that year. In some respects, the year 2013 was already a 1995 rerun, with financial markets unclenching from a growth-and-rate scare to melt up by 30 percent. But bulls can at least hope Powell’s pivot has a similar effect on markets as Greenspan’s did 24 years ago.
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