CNBC’s Jim Cramer said Friday that this week was the latest example of the market going mad after a Federal Reserve meeting.
But based on past market reactions to the central bank’s earlier rate hikes, this week’s activity may not prove all that significant over the long term.
The initial reaction to the Fed’s moves is “almost always a fake head,” Cramer said.
The market had a big reaction this week after the Fed’s latest move, Cramer noted – with a harsh sell-off on Wednesday followed by a minor comeback on Thursday and a chaotic session on Friday. While renewed turmoil in the European financial sector dragged stocks lower early Friday, they rallied after European markets closed.
After the central bank raised interest rates by a quarter of a point on Wednesday, we have now had nine rate hikes in just over a year.
After the market’s initial movement in the first three days after a Fed decision, things will typically go in the opposite direction the following month, Cramer said.
Looking at the last eight rate hikes in this cycle, the market reversed direction seven times out of eight over the following month. (There is not enough data to do an analysis of the rate hike in February.)
The only exception was the second rate hike in early May. This resulted in a harsh sell-off that lasted for several days, and for the following month markets were basically flat.
When you zoom out three months, initial market moves — whether positive or negative — tend to reverse each time, Cramer said.
According to Cramer, the pattern is too overwhelming to ignore.
Of course, it remains to be seen if this pattern will continue this time and if the initial negative reaction to this week’s Fed move will reverse.
This time, with new emergencies cropping up virtually every day, particularly in the banking sector, “it feels dangerous” to predict a rally over the next three months, Cramer noted.
But the bottom line is we’ve been here before, he said.
“So take a deep breath, have some tea, and remember that the initial reaction to the Fed’s rate hikes over the past year has been wrong every time,” Cramer said.
Maybe that time won’t be as meaningful, he said.