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 past market reactions to previous central bank rate hikes, activity this week could prove insignificant in the long run, he said.
The initial reaction to Fed decisions is “almost always a false head,” Cramer said.
The market had a big reaction this week to the Fed’s latest move, Cramer noted — with a sharp selloff on Wednesday, followed by a small comeback on Thursday and a rocky session on Friday. While further turmoil in the European financial sector sent stocks lower early on Friday, they rallied after those markets closed.
Following the decision of the central bank quarter point rate hike on Wednesday, there were nine increases in just over a year.
The market has been trending where — after the first three days following a Fed decision — it will generally go in the opposite direction next month, Cramer said.
Looking at the eight previous rate hikes this cycle, the market reversed direction over the next month seven out of eight times. (There is not enough data to analyze February’s rate hike.)
The only exception was the second which occurred in early May. This caused a sharp sell-off that lasted several days and the markets remained virtually flat for the month that followed.
Typically, when you zoom out three months, initial market moves — whether positive or negative — tend to reverse each time, Cramer said.
The pattern is too overwhelming to ignore, Cramer said.
To be sure, it remains to be seen if that same trend will continue this time around, or if the initial negative reaction to the Fed’s decision this week will reverse.
This time, with new emergencies cropping up virtually daily, particularly in the banking sector, it “feels dangerous” to predict a recovery over the next three months, Cramer said.
But in the end, we have already been here, he stressed.
“So take a deep breath, drink some tea, and remember that the initial reaction to Fed rate hikes has been wrong every time over the past year,” Cramer said.