Based upon the market’s response to the Fed’s “no change” announcement yesterday, it would seem the all-clear has been sounded and the market is destined for further gains. Unfortunately, past S&P 500 performance suggests that those gains may not occur as soon as one might expect.
In the above chart, the 30 trading days before and the 60 trading days following the release of a scheduled FOMC statement release have been plotted. All told there have been 45 such meetings since January 1, 2008. Of these 45, the S&P 500 responded with a gain on the day 27 times. Of these 27, 13 of the gains were greater than or equal to 1%. Yesterday S&P 500 gained 1.2%, making it the 14th occurrence. The three lines plotted represent the average percent change of the S&P 500 in each of these described scenarios. (2008 to present was chosen because that is when the current period of unprecedented monetary policy action begun.)
What is clear in the chart above is the larger the gain on the day the statement is released, the worse the S&P 500 performed, on average, over the next 60 trading days. This would seem counter intuitive at first as the belief would be that the market received what it wanted. However, everyone then becomes bullish and expectations soar and the underlying reason for the FOMC’s action (or non action) is overlooked. In yesterday’s case, the FOMC found that fundamental data does not support a tightening of monetary policy. It could be this disconnect between reality and expectations that ultimately leads to modest declines as all the bulls are slowly disappointed by data.
By Christopher Mistal