Take Away The Punch Bowl, Small-Cap Stocks May Keep Drinking

Ian Cassel Blog, Educational Leave a Comment

By Perritt Funds

Investor attention has focused on the Federal Reserve’s actions following a relatively chaotic few months in the bond market. Chairman Bernanke recently suggested that the Fed would perhaps begin tapering its purchases of bonds, and that bond buying could be completely over by the middle of 2014. The Fed talking seriously about tapering has many investors considering the logical next phase – albeit far down the road – of an eventual new era of Fed tightening.

While exact dates and periods of past tapering actions or interpretations of “Fed speak” can’t be measured precisely, we can take a look at past periods of interest rates hikes and their effect on small cap equities. From this data, investors may gain some historical context to enhance their perspective regarding future Fed actions and market returns.

The previous six times the Fed embarked on a tightening cycle and the associated small-cap returns are below:

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