What if the Fed Chairman Jerome Powell succeeds in his “softish” landing, like the central bank’s rare 1994-’95 tightening cycle that didn’t knock the economy into the dumps?
With recession fears gripping markets as the Federal Reserve pulls back its easy-money stance to fight high inflation, investors have had few places in 2022 to hide from carnage in financial markets.
Mizuho Securities economists looked at which assets performed best through that cycle. They found stocks and commodities CL00, +0.05% GC00, -0.02% produced the highest returns of roughly 12% and 11%, respectively, as rates peaked , followed by investment-grade corporate bonds, LQD, +0.03% as the Fed doubled its policy rate to about 6%, or 600 basis points.
The dollar DXY, -0.15% ended the cycle down more than 15%, as measured against a basket of rival currencies, while the S&P 500 index SPX, +1.99% and several other asset classes found a bottom “mid-tightening cycle.” Of note, home prices stayed roughly flat. “Of course, there are major economic and valuation differences between today and 1994,” the team wrote, adding that a “soft landing” isn’t their baseline economic scenario for the current tightening cycle.
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