In recent weeks, investors hoping for a new bull market are begging for a change in Federal Reserve policy, aka the Fed pivot, from a hawkish stance to a more dovish one.

Google search trends have been parabolic for the search term “Fed pivot.”

Thus far, the Fed hasn't delivered on the hope of a pivot even though the market is pricing in that rate hikes are likely due for a pause after the Fed's first meeting in 2023.

“It will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal,” Fed Chair Jerome Powell said at a press conference last Wednesday.

Sorry but this isn't a pivot but what the market is already expecting. Even if the Fed actually did a full pivot and decided to cut interest rates, this wouldn't necessarily be a bullish signal in the current bear market.

Be careful what you wish for

Market commentators are acting like a Fed pivot to cutting rates would automatically be bullish, but be careful what you wish for. If the Fed decides to cut interest rates, it would be an acknowledgment that we are in a recession and/or there are plumbing issues in the financial markets creating substantial risks.

Remember that in the past two major recessions (2000-2003 and 2008), the Fed cutting rates did nothing to stop the stock market declines. Let's take a closer look.

In the chart above, you can see the effective Fed funds rate (blue line) vs the Wilshire 5000 index (red line).

In 2000, the Fed funds rate was 6.5 percent when the Fed shifted to a dovish policy and started to cut rates all the way down to just 1.75 percent by 2002. This provided some short-term rallies but the market didn't bottom until the fall of 2002.

In the Great Financial Crisis, the Fed funds rate was 5.25 percent when the Fed made its first rate cut in the fall of 2007. The Fed aggressively cut rates all the way down to zero by December 2008. The market ultimately bottomed in March 2009.

As you can see, a Fed pivot is not a guarantee of a market turn but can be a signal that the Fed is fighting a recession. While many economists are counting on the Fed navigating a soft landing, this is an extremely challenging environment with high inflation and a weakened consumer. Technology earnings from Apple, Amazon, Google, and Meta were all disappointing. Meta is expected to announce significant layoffs this week.

Goldman Sachs top equity strategist, David Kostin, just lowered its 2023 EPS forecast for the S&P 500 to 0%. Should the economy fall into a recession, their earnings forecast would fall to -11%.

A hard landing is becoming more likely in 2023.

feature image from Unsplash