Market reaction to Fed rate hike ‘always fake’

CNBC’s Jim Cramer said Friday that this week was the latest example of the market frenzy after the Fed meeting.

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

The initial reaction to the Fed’s moves, Kramer said, is “always a head-banger.”

Cramer noted that the market had a major reaction this week after the Fed’s latest move – with a harsh sell-off on Wednesday, followed by a small comeback on Thursday and a chaotic session on Friday. While fresh turmoil in the European financial sector sent stocks lower early on Friday, they recovered after European markets closed.

After the central bank raised interest rates by a quarter of a percentage point on Wednesday, we’ve now had the widest rate hike in just over a year.

After an initial market move in the first three days after the Fed’s decision, Kramer said, it usually goes in the opposite direction the following month.

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

The only exception was the second rate hike that occurred in early May. This led to a hard sell-off that lasted for several days, and the markets basically flattened out in the month that followed.

In general, when you zoom out by three months, initial market movements — whether positive or negative — tend to reverse themselves each time, Cramer said.

According to Cramer, this pattern is too overwhelming to ignore.

To be sure, it remains to be seen if this same pattern will continue this time around, and whether the negative initial reaction we saw to the Fed’s move this week will reverse itself.

This time, Cramer noted, with new emergencies emerging every day, especially in the banking sector, it is “dangerous” to expect prices to rise over the next three months.

But the bottom line, he said, is that we’ve been here before.

“So take a deep breath, drink some tea and remember that the initial reaction to the Fed’s rate hike has been wrong every time over the past year,” Cramer said.

He said maybe this time it won’t be meaningful.