By: James Stanley, Sr. Strategist
The Federal Reserve raised rates six times in 11 months as the dot-com bubble peaked, and stocks kept climbing through most of that tightening cycle. In the dot-com bust, Federal Reserve rate hikes hit stocks only after a lag, once falling Treasury yields made bonds the more attractive trade and capital rotated out of equities. That sequence is back in focus with the S&P 500 and Nasdaq at record highs while the Federal Reserve hikes and the 10-year Treasury yield sits at multi-year highs.
James Stanley, StoneX Media Senior Market Analyst, has spent more than two decades working across equities, options, fixed income and foreign exchange, starting in stock markets in 1999. He analyzes price action alongside macroeconomic drivers, tracking how Federal Reserve policy, Treasury yields and equity indices interact over time frames of two days to two weeks.
The Federal Reserve raised rates six times in 11 months during the dot-com cycle, and the first hikes did little to slow a massive upside run in stocks. Markets shrugged off the opening move and pulled back only modestly after the next one. The turn came, Stanley recounts, when "in March they hiked 25 again. And that's when markets all of a sudden started to bleed a bit". The sequence shows how Federal Reserve tightening can build pressure on equities over several meetings before the damage registers in prices.
"One of the main push points was an overly aggressive Fed trying to handle and deal with inflation," Stanley says of the dot-com bust, which had no single cause. The Federal Reserve delivered a further 50 basis point hike in May 2000, after which markets treated the tightening cycle as finished. Treasury yields fell and Treasury prices rose after the August 2000 stock market high, giving investors a more attractive trade outside of equities. As a result, capital rotated out of stocks and into bonds, a pattern that also followed the June 2007 peak in the 10-year Treasury yield ahead of the financial crisis.
The S&P 500 and Nasdaq have reached fresh all-time highs despite a Federal Reserve rate hike, a hawkish assurance of another, and a 10-year Treasury yield at multi-year highs. The Dow and the Russell 2000 have not joined the rally, with higher yields weighing more heavily on smaller companies than on large caps. Stanley draws a direct line from the 2000 run-up to the current setup, with stocks once again climbing through tightening. For self-directed traders, the dot-com parallel shifts the focus to when rate hikes start to register in equity prices, rather than whether they do. According to Stanley, the market is in "this bullish capitulation scenario where it rallies into hikes until eventually the hikes start to matter".
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: James Stanley, StoneX Media Senior Market Analyst
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The dot-com era showed how Federal Reserve rate hikes can build pressure on stocks for months before capital finally rotates into Treasuries. With the S&P 500 at records despite fresh tightening, that sequence is back in focus for equity traders.
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