How Long for This Fed Rally?

No matter what asset class you call home, you've probably already seen enough charts depicting what happens when the Federal Reserve begins to raise interest rates.

You've probably also heard enough about how you shouldn't put too much faith in those charts because this cycle is so much different from all those that came before it.

Yet for whatever reason, it's soothing to study the past when trying to wrap your mind around an unpredictable event, whether it be what financial markets do after interest rate increases or what a football team does on their home field in the rain with a backup quarterback (after an interest rate increase, of course).

Some studies of the past are more believable as predictive statistics than others. Bloomberg's Lu Wang presented a few in an article about the U.S. stock market that stand a good chance of proving to be accurate.

First, the S&P 500 became more volatile in 10 out of the last 12 tightening cycles. Going back 70 years, daily swings in the index increased by 23 percent on average in the six months after the first rate increase compared with the half year leading up to it, according to her reporting. Second, the S&P 500’s price-earnings ratios shrank during the first year in 10 out of the 12 Fed tightening cycles, falling an average 15 percent.

Interestingly, these two phenomenons seem to have begun even before the first rate increase. Daily moves up or down in the index have averaged almost 23 points, more than a third bigger than 2014. The S&P 500 last set a record in May and valuations definitely appear to have stopped their march higher this year: