Please consider some data. Readers should try as hard as possible to put aside their pre-conceived notions. Pretend you are looking at it for the first time. In many cases, readers probably will be doing exactly that!
For best results, make a note or two about what you might infer from this compilation.
I am delighted to see some attention to mistakes in the use of statistical methods. This is one of the main purposes at "A Dash." As usual, Barry Ritholtz is right on top of this discussion. Hat's off to Brett Steenbarger for posing the question in a way that commanded attention.
It is easy to say that this is an error committed by others. In fact, the conventional wisdom of the market regularly makes exactly the same mistake, led by the leading strategists, the media, and the foremost blogs.
Conclusions from the Data
I plan to test this on a college class where I have been invited to give a guest lecture (after a long layoff!). Perhaps I can persuade Scott Rothbort, a savvy manager who graciously shares his expertise, to do the same in his class.
I have conducted hundreds of graduate seminars, so I have some insight into how this might go. But readers can pretend to be part of the seminar, and even suggest things to me before I do it. Here is what I expect to hear, varying by the sophistication of the student:
- These situations vary a lot. There are not enough cases like the current situation to make any good prediction.
- Why are you including cases from the Great Depression?
- Why are you including cases from the Vietnam era? Wasn't that a bit unusual?
- Doesn't the speed of the tightening matter?
- Doesn't the eventual level of interest rates matter?
- What happened in the 2000 era? Did Fed tightening really cause the market reaction then? I thought there was something about an Internet bubble....
- Fed tightening cycles seem to have worked out better in recent days than in the old days. (One has to remember that for students, anything ten years ago was "the old days!"
- Fed tightening is a leading indicator of poor market performance.
What do you think? Current market wisdom, repeated by everyone, suggests that the Fed tightening cycle will fail to achive what some call a soft landing and we call The Glide Path. The market has embraced the last of the listed conclusions, when it is demonstrably the worst inference on the list. A typical quote says something like "The Fed has only achieved one soft landing in history."
This implies that there are many similar data points, meeting the Steenbarger criterion for statistical inference, and that we are on sound footing in advising investors to be wary.
Perhaps my message should be that there is room for good researchers on Wall Street!!