Expert Warns 50% Drop Could Already Be Underway

• The Federal Reserve is getting set to hike interest rates in the next several weeks.
• Many on Wall Street see stocks surviving the front-end hikes as they have in recent decades.
• But according to Jon Wolfenbarger, that won’t necessarily be the case this time.

A commonly accepted thought on Wall Street is that bull markets thrive until the Federal Reserve raises interest rates several times and takes away the figurative punch bowl.

Stocks have done well even during the first few rate hikes, as the chart below from Lance Roberts at RIA Advisors shows.

“On the front end of a rising interest rate cycle, markets do very well,” Ryan Jacob, the chairman and CIO of Jacob Asset management, said. “On the front of a rising rate environment, you need to have a very strong economy. It’s pretty hard to argue it’s not strong.” 

But stocks haven’t always thrived until after the Fed has raised their overnight lending rate in a meaningful way. They’ve also fallen before the Fed hikes rates substantially.

If you look back to the late 1960s and early 1970s — which the above chart doesn’t include — stocks fell before the central bank increased the cost of borrowing significantly, said John Wolfenbarger, a former Allianz Global Investors securities analyst and the founder of BullandBearProfits.com.

They’ve also fallen when short-term interest rates aren’t necessarily rising quickly. Short-term interest rates tend to hew closely to the Federal Funds Rate.

Wolfenbarger explained this in recent commentary, highlighting bear markets that started in 1968 and 1972, and where short-term rates were.

This chart compares those episodes to the difference between long- and short-term bond yields. This so-called yield curve turning negative has been an extremely reliable

recession

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