One of the core principles underlying contrarian analysis is that widely held positions can be hazardous to your wealth.

That’s because these positions enjoy immunity from critical scrutiny. If everyone believes something to be true, after all, no one is likely to see any need to re-examine it. Any flaws in those positions get a free ride.

A perfect current illustration of this phenomenon is the notion that the all-clear signal will be sounded for stocks once the Federal Reserve stops raising interest rates.

Almost everyone, it seems, assumes this notion is gospel. And, sure enough, the stock market rose smartly earlier this year when the Fed’s Open Market Committee ever-so-slightly changed its wording to indicate that further rate hikes were less of a certainty.

There’s just one problem with this widely held notion: It does not stand up to historical scrutiny.

I owe this insight to James Stack, editor of InvesTech Research Market Analyst. In recent issues of his newsletter, Stack showed that, over the months following the final hike in a series of Fed rate hikes, more often than not, the stock market has declined.

Specifically, Stack looked at all instances in the Federal Reserve’s history in which it raised interest rates at least two times in succession. Then, he measured the S&P 500’s gain or loss following the final rate hike in each of these instances.

On average, the S&P 500 index (TICKER:SPX) was lower three months later, six months later and a year later.

To be sure, some of the worst experiences for the stock market following the Fed’s final rate hike came in the Great Depression, some 70 years ago. But, even if you ignore those outliers, Stack’s results still show that the stock market, on average, declines over the six months following the final hike and is only 1.8 percent higher a year later.

The major exceptions to this general rule, according to Stack, came when the Fed not only stopped raising rates, but, soon thereafter, let them decline.

How likely is it to occur this time around? By way of an answer, Stack notes that this would require, among other things, a significant easing of inflationary tensions without the economy also slipping into a recession.

And how likely is that?

This helps to explain why Stack’s primary advice to clients these days is “Don’t buy any stocks that you wouldn’t want to own in a recession.”

Mark can be contacted via email at mhulbert@marketwatch.com.

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