Despite disappointment that central banks in the U.S. and Europe offered no new stimulus programs last week, the U.S. stock market rose for the fourth straight week – thanks to one piece of government news, according to Bloomberg.
This particular piece of news is released on the first
Friday of each month and investors eagerly await its arrival as it has the
potential to move markets. In fact, this news is so sensitive that news
reporters are locked up in the Frances Perkins building in Washington, D.C. for
30 minutes prior to its release with absolutely no contact with the outside
world. The reporters have 30 minutes to review the report, ask questions, write
their story, and then precisely at 8:30 a.m., the government opens the
communication gate and the news hits the world.
And, so, last Friday morning, the government released its
Employment Situation Report. Within seconds, it was clear that the increase in
the number of new nonfarm payroll jobs created in July was much higher than
expected and the stock market unleashed a powerful rally, according to
MarketWatch. Since employment leads to economic activity, investors pour over
this report for clues to the direction of the economy.
Now, here’s where it gets interesting. The data was stronger
than expected, but it wasn’t strong enough to prevent the Federal Reserve from
adding more monetary stimulus later this year, according to some economists as
reported by MarketWatch. In other words, some folks interpreted this as meaning
we could have modest economic growth and more
monetary stimulus. That’s like a double shot of espresso for the markets.
This is great, right? Unfortunately, it’s not that simple. One
month of good employment data does not make a trend and additional stimulus
from the Fed is not guaranteed. Even if additional stimulus comes, it could
backfire if the market perceives it as too little, too much, or not the right
kind. In the end, we’re still left with the hard work of analyzing the economy,
the investment opportunities, and doing the best job we can to help you
navigate this uncertain environment.
IS THERE A PARTICULAR
24-HOUR PERIOD IN THE STOCK MARKET that is more important to future
stock market returns than any other 24-hour period? Since we asked the
question, you might have guessed that the answer is yes.
For many years, the Federal Reserve’s (Fed) monetary
policy-making body, called the Federal Open Market Committee (FOMC), has
convened at pre-scheduled meetings eight times per year. During these meetings,
“The Committee reviews economic and financial conditions, determines the
appropriate stance of monetary policy, and assesses the risks to its long-run
goals of price stability and sustainable economic growth,” according to the
Fed’s website. And, since 1994, the policy decisions from these meetings have
been announced to the public at known times.
Two months ago, the Federal Reserve Bank of New York
released a study which contained a startling conclusion. The researchers
discovered that, “a staggering 80 percent of the annual U.S. equity premium
since 1994 was earned in the 24 hours before FOMC announcements.” Further, if
you extend the period to three days, i.e., from the day before the announcement
to the day after the announcement, the study shows that effectively 100 percent
of the return in the S&P 500 index since 1994 has come from this 3-day
window encapsulating the FOMC announcement. And, to put it in even more
perspective, Yahoo! Finance said, “This pre-FOMC drift has pumped the S&P
500 more than 50 percent higher than it would be without the gains made in the
24-hour period before Fed statements.”
Hmm.
So, how does the Fed explain this anomaly? They end their
research paper by saying, “As of this paper’s writing, the pre-FOMC
announcement drift is a puzzle.”
Now that this anomaly is known, is there a way to profit
from it? Probably not. For one thing, the frequent trading required to capture
these gains and then move to cash until the next meeting would be expensive and
tax inefficient. And, second, now that the strategy is known, it will likely
disappear as investors try to “game” it.
Well, at least we know our tax dollars are hard at work
paying researchers to come up with interesting market studies!
Weekly Focus – Think About It…
Adversity, if you allow it to, will fortify you and make you
the best you can be.
--Kerri
Walsh, Olympic Gold Medal Champion
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