Long time readers or market observers will remember the infamous David Tepper (hedge fund manager) call on CNBC ahead of QE2 in 2010. Essentially "the economy gets better or the Fed will come in – either way you have to buy stocks." Whatever Bernanke said early in the day didn't seem to make markets happy but as the day passed the view of his answers changed. Most likely by the financial media – nowadays it's a lot of perception by the financial infotainment that shapes views. So if Mr. Liesman says "Bernanke clearly is saying it's coming" then this skews the belief system, especially in the short run. And you get guys like Brian Kelly shouting on the CNBC that you must buy stocks yada yada.
There appears to be disappointment today since Ben didn't say "I will give you QE". He, nor any Fed Chief, gives such comments at a Congressional hearing so I am always amazed every year when people expect that to happen.
It doesn't feel like it since Friday's session was up substantially but this market is down 8 of the past 9 sessions. Impossible to build any headway obviously in this environment.
EDIT Noon: Ok make that 7 out of 9.
We have some fascinating cross currents as this era of never seen before central bank intervention is creating new paradigms. The 10 year U.S. bond continues to have an incredible bid underneath it as yields plummet, which normally points to extreme caution and recession ahead. Economic data has been poor (and worsening) for months – yesterday we had the 3rd month of decline in retail sales, which is rare to see. Yet the market holds up in the face of this as the belief in omnipresent powers by central banks has investors not wanting to be sidelined in case they miss another "QE rally". Certainly many traditional relationships have been skewed. …
A very interesting story yesterday by the fantastic Gretchen Morgenson in the NYT that harkens to the "trading huddle" scandal (that quietly went into the night after a $22M fine i.e. tiny cost of business) [Aug 27, 2009: Goldman Sachs Trading Huddles]. Apparently big boy clients (i.e. Blackrock, some big fish hedgies) have been sending out "surveys" to analysts to get their "opinions" of companies out in the market. While this is a gray area i.e. are these companies getting non public info or not? what is fascinating is the internal documents Morgenson somehow obtained that explicitly state some of these firms are seeking to "front run" analyst opinion changes. Anyone who has been in the market for a while knows how when analysts' wave their wands stocks can often dive or rise 3-4-5%+ overnight. So a "survey" that hints at such a change would be incredibly valuable. Just another day in crony capitalism. …
A reader forwarded me a remarkable piece that originated from the NY Fed. Based on a study they did a vast majority of stock market return since 1994 has happened in the 3 day window around the 8 annual FOMC announcement days, with a heavy tilt to the day BEFORE the FOMC announcement. While it is common knowledge that a lot of people try to front run the Fed, the magnitude of this effect on the market in black and white is shocking. Essentially to capture almost all return of the market since 1994, one need only be in the market 24 days a year.
Per WSJ Markebeat Blog:
For many years, economists have struggled to explain the “equity premium puzzle” — the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.”
We don’t find analogous drifts ahead of other macroeconomic news releases, such as the employment report, GDP and initial claims, among many others. The effect is therefore restricted to FOMC, rather than other macroeconomic, announcements.
The charts below shows how the S&P 500 performs on the days before and after Fed announcements. Stocks tend to rise more on the day before and morning of the released statement, whereas gains level off following the announcement for the remainder of the session and the following day.
“In a nutshell, the figure shows that in the sample period the bulk of the rise in U.S. stock prices has been earned in the twenty-four hours preceding scheduled U.S. monetary policy announcements,” the economists say.
The full report can be found here.