Market reaction to Fed rate hike ‘almost always fake’

CNBC’s Jim Cramer said Friday that this week was the latest example of the market going crazy after a Federal Reserve meeting.

But based on previous market reactions to the central bank’s previous rate hikes, this week’s activity may not prove to be very meaningful in the long run.

The initial reaction to the Fed’s moves is “almost always bogus,” Cramer said.

The market reacted strongly to the Fed’s latest move this week, Cramer noted — with a hard sell-off on Wednesday, followed by a small comeback on Thursday and a chaotic session on Friday. As renewed turmoil in the European financial sector dragged stocks lower early Friday, they recovered after European markets closed.

After the central bank’s rate hike of a quarter of a percentage point on Wednesday, we’ve 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, it will usually move in the opposite direction the following month, Cramer said.

Looking at the previous eight rate hikes in this cycle, the market has reversed direction seven out of eight times the following month. (There is not enough data to conduct an analysis of the February rate hike.)

The only exception was the second rate hike that took place in early May. That led to a hard sell-off that lasted several days, and markets were virtually flat in the following month.

In general, if you zoom out three months, the initial market moves — whether positive or negative — tend to reverse themselves every time, Cramer said.

The pattern, according to Cramer, is too overwhelming to ignore.

Certainly, it remains to be seen whether that same pattern will hold up this time around, and whether the negative initial reaction we saw to the Fed’s action this week will reverse itself.

This time, with new emergencies almost every day, especially in the banking sector, it feels “dangerous” to predict a rally in 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 this time won’t be as meaningful either, he said.