S&P500 after the last hike update – a selection of scenarios.
Looking through history, we can distinguish several scenarios for the S&P500:
1) soft landing,
2) deflationary hard landing,
3) inflationary hard landing and
4) crash landing.
If we compare the current cycle of rate hikes by the FED to the deflationary cycles of 1989, 2006, 2018 - since the last rate hike, the S&P500 has increased by some 20-30% (Figure 1).
The tightening cycle that ended in 2000 is a scenario of the Internet bubble bursting (crash landing).
We also have two examples of the soft landing scenario from the 1990s, and the inflationary cycles of 1969, 1974 and 1981 - see Figure 2. Figure 3 also shows these scenarios (color-coded).
Currently, we are closest to the soft landing / deflationary hard landing scenarios. But unfortunately, the market (S&P500) may simultaneously price different scenarios (with different probabilities) depending on the incoming data and investor sentiment.
For example, the declines of the S&P500 from the end of July to October 2023 were more of an inflationary hard landing scenario (the market was afraid of inflation and further FED’s hikes).
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