An Astonishing Statistic

As the final FOMC announcement of the year approaches, we want to briefly return to the topic of how the meeting tends to affect the stock market from a statistical perspective. As long time readers may recall, the typical performance of the stock market in the trading days immediately ahead of FOMC announcements was quite remarkable in recent decades. We are referring to the Seaonax event study of the average (or seasonal) performance across a very large number of events, namely the past 160 monetary policy announcements and the 10 trading days surrounding them. It looks as follows:

 

We have highlighted the period of maximum profit over the past 20 years in dark gray, which is achieved over a holding period of  8 trading days and amounts to an average of 60 basis points. At first glance that may not look like much, but it actually works out to a 21.89 percent annualized gain, which exceeds the gain generated in the “rest of the time” by a vast margin. As the detailed returns in individual years at the bottom show, in some years particularly large gains were posted around FOMC meetings – these were as a rule associated with new cyclical bull markets just after the end of major bear markets. The largest losses were obviously primarily associated with bear market periods, but they are both much fewer in number than the gains and much smaller on average – click to enlarge.

 

It makes little difference if one extends the study to a 30 year time frame (or 240 events) – the return is almost the same, only the optimal holding period becomes 9 days instead of 8 trading days. The same holds if one compresses the study to 15 years or 120 events – the return and optimal holding period are equal to those of the 20 year study.  If one compresses it further to just 10 years (or 79 events), the result actually gets better: the average return per event expands to 0.72%, boosting the annualized return to 27.10 percent.

Obviously, the smaller the sample size, the less statistical validity the result will have, but we have noticed that it often makes sense in seasonal studies to look at studies in shorter time frames as well. In fact, as long as a major market trend remains intact, “recency bias” will increasingly tend to hold sway.

 

When halving the number of events in the study, the result becomes even more impressive – obviously, this is mainly due to the strength of the post-GFC echo bubble – click to enlarge.

 

When the number of events included in the study is expanded to 700, or a 90-year time period, a significantly smaller average return of 0.38% is achieved (however, the median is higher at 0.50%, due to the proliferation of large gains in more recent decades). This is still an impressive 14.69 percent annualized, which beats the “rest of the time” gain handily as well.

 

Measured over a 90 year stretch (700 events), the average return declines to 0.38% for the 8 day holding period, but that still amounts to 14.69 percent annualized and handily beats the “rest of the time” gain in the index – click to enlarge.

 

The explanation for the much smaller “event return” over the 90 year stretch is that central bank intervention has become a great deal more important to financial markets since the adoption of the pure fiat money system in the wake of Nixon’s gold default in 1971. One only has to take a look at the long term trend in total US credit market debt to see why that is the case.

 

As a result of the huge expansion in credit market debt once the pretense that governments were going to be keep their currencies sound was finally abandoned entirely, central bank decisions have become far more important to financial markets than they used to be.

 

It Gets Even Crazier…

The upcoming FOMC announcement seemed a good opportunity to return to this topic, but what we are actually most eager to show is a chart that compares  the cumulative gain one would have achieved if one had invested exclusively in the 2 days preceding every FOMC announcement (i.e., for the duration of the FOMC meeting) with the gain that would have been achieved by being invested exclusively on all other days. The total gain achieved by the SPX as such is shown as well:

 

If one had been long the S&P 500 days exclusively over the 2 days of every FOMC meeting (while being out of the market the entire rest of the time), one would have achieved a capital gain almost equal to that of a buy & hold strategy. Since there are eight FOMC meetings per year, one would have been in the market for a total of just 16 days per year, or 320 days in 20 years. Being in the market exclusively over the rest of the time would have made no sense at all; the net gain achieved in this time period over the past two decades was negligible. In fact, most of the time one would have sported large paper losses. Obviously, a very big loss would have been made in real terms anyway – click to enlarge.

 

This chart is quite the stunner – and what makes it so stunning is that the risk-adjusted return when being exposed to the market over just 16 trading days every year is of course vastly superior to that of a buy & hold approach. One can safely ignore trading commissions, considering that discount brokers charge less than $5 per trade these days, regardless of size.

One might object that the method fails to capture the microscopic dividend yield of the SPX, but consider the fact that the entire sum invested will be available for alternative purposes 336 days every year. Surely it won’t be too hard to make up for missing out on the current SPX dividend yield of 1.83%. There once was a time when dividends generated the bulk of long term stock market returns, but that was before the modern age of massive money supply and credit inflation.

 

Conclusion

The statistics discussed above are yet another (indirect) hint that broad stock market returns are largely dependent on monetary inflation and hence on the actions taken by central planners. Everything else is secondary. This strikes us as a rather deplorable state of affairs. In fact, it can be shown that prior to the institution of pure fiat money, the stock market delivered far larger returns in real terms than it has delivered ever since (this can be ascertained by comparing long term cumulative stock market returns in terms of gold).

 

Robert Prechter of EWI published a chart that compares real returns in the stock market under a sound money regime with those achieved under the fiat money  regime. The 1965 cut-off date was chosen on the basis that this was the year in which the last precious metals coins (silver dollars) were minted to serve as general media of exchange. Incidentally, this was also very close to the end of a major wave up in the stock market in nominal terms – click to enlarge.

 

However, we cannot change this, so our focus is mainly on making the best of the situation. Obviously, the information presented here can be used profitably if one employs it in a disciplined manner, with the caveat that even if the statistics show us  high probability outcomes, there is no guarantee that market action won’t change in the future.

An important thing to keep in mind in this context is also that the behavior of the market around the FOMC announcement can be used as a signal. In other words, if the market’s behavior begins to deviate significantly from the statistical average and FOMC announcements begin to be associated with losses rather than gains, it will be a strong sign that the market’s character has changed from a bull to a bear market phase.

 

Charts by: Seasonax, St. Louis Fed, Elliott Wave International

 

PS: if you want to learn more about Seasonax, click here.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “The Stock Market and the FOMC”

  • Hans:

    I’ll say this until I am blue in the face,
    most of this massive rally was due to
    the FRBs manipulation of short and long
    interest rates.

    I believe this to be the third biggest Dow or
    S&P 500 rally in history.

    The tax bill, if ratified, will do little to spur the
    economy; with the same if corporations repatriate
    their foreign cash holdings.

    And yes, the loss of gold link currency leads to larger
    and larger spending, ending with massive and unpayable
    debt. The metals force the inept and corrupt CONgress
    to act responsibly or at least at the margins.

    Spending has not been addressed for some fifty years,
    and will not be so until America is thrown into a economic
    and fiscal crisis.

    There will be grave consequences for any society, which
    does not discharge its responsibilities. It will be ugly and
    cause undue hardships. We shall all be to blame.

    Merry Christmas Y’all and a Happy Fiscal New Year!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Stock Market Manias of the Past vs the Echo Bubble
      The Big Picture The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.   Who's who in the zoo in...
  • How the Global Trade Contraction Begins
    Historical Evidence The world grows increasingly at odds with itself, with each passing day.  Divided special elections.  Speech censorship by Silicon Valley social media companies.  Increased shrieking from Anderson Cooper.  You name it, a great pileup is upon us.   It was probably Putin's fault (just a wild guess) [PT]   From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come...
  • TARGET-2 Revisited
      Capital Flight vs. The Effect of QE Mish recently discussed the ever increasing imbalances of the euro zone's TARGET-2 payment system again in response to a few articles which played down  their significance. He followed this up with a nice plug for us by posting a comment we made on the subject. Here is a chart of the most recent data on TARGET-2 available from the ECB; we included the four largest balances, namely those of  Germany, Italy, Spain and the ECB itself.   The...
  • Gold Sector – An Obscure Indicator Provides a Signal
    The Goldminbi In recent weeks gold apparently decided it would be a good time to masquerade as an emerging market currency and it started mirroring the Chinese yuan of all things. Since the latter is non-convertible this almost feels like an insult of sorts. As an aside to this, bitcoin seems to be frantically searching for a new position somewhere between the South African rand the Turkish lira. The bears are busy dancing on their graves.   Generally speaking bears have little to...
  • When the Freaks Run Wild
      Conditioned to Absurdity The unpleasant sight of a physical absurdity is both grotesque and interesting.  Only the most disciplined individual can resist an extra peek at a three-legged hunch back with face tattoos.  The disfigurement has the odd effect of turning the stomach and twisting the mind in unison.   Francesco Lentini, the three-legged man. Born in Sicily in 1881 with “three legs, four feet, sixteen toes and two pair of functioning genitals” he made a career of...
  • What Have You Done For Me Lately? Precious Metals Supply and Demand
      Aragorn's Law or the Mysterious Absence of the Mad Rush Last week the price of gold dropped $8, and that of silver 4 cents.  There is an interesting feature of our very marvel of a modern monetary system. We have written about this before. It sets up a conflict, between the perverse incentive it administers, and the desire to protect yourself in the long term.   Answer: usually when it is too late... [PT]   Consider gold. Many people know they should own it. They...
  • An Inquiry into Austrian Investing: Profits, Protection and Pitfalls
    Incrementum Advisory Board Discussion Q3 2018 with Special Guest Kevin Duffy “From a marketing perspective it pays to be overconfident, especially in the short term. The higher your conviction the easier it will be to market your investment ideas. I think the Austrian School is at a disadvantage here because it’s more difficult to be confident about your qualitative predictions and even in terms of investment advice it is particularly difficult to be confident in these times because we...
  • Climbing the Milligram Ladder - Precious Metals Supply and Demand
    FRN Muscle Flexing Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver. It’s less uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.   Even the freaking leprechaun is now offering government scrip...  this really...
  • Introducing the Seasonax Web App
      Closing the Affordability Gap Up until recently, the Seasonax app was only available to users of Bloomberg or Reuters terminals, putting it out of reach of most non-institutional investors. This has now changed. A  HYPERLINK "https://app.seasonax.com/"web-based version has become available which anyone can use, and it comes at a much lower price point as well. When visiting the site where the app is hosted, this is the welcome screen:   Featured patterns at the Seasonax web app...
  • Wall Street - Island of the Blessed
    Which Disturbance in the Farce can be Profitably Ignored Today? There has been some talk about submerging market turmoil recently and the term "contagion” has seen an unexpected revival in popularity – on Friday that is, which is an eternity ago. As we have pointed out previously, the action is no longer in line with the “synchronized global expansion” narrative, which means with respect to Wall Street that it is best ignored.   Misbehaving EM currencies – the Turkish lira...
  • Fundamental Price of Gold Decouples Slightly - Precious Metals Supply and Demand
    The Fundamental Price has Deteriorated, but... Let us look at the only true picture of supply and demand in the gold and silver markets, i.e., the basis. After peaking at the end of April, our model of the fundamental price of gold came down to the level it reached last November. $1,300. Which is below the level it inhabited since Q2 2017. We will look at an updated picture of the supply and demand picture. But first, here is the chart of the prices of gold and silver.   Gold and...
  • The Fake Promise of Adult Day Care
      Cold Dark Clouds The sun always shines brightest in the northern hemisphere during summer’s dog days.  Here in America, from sea to shining sea, the nation burns hot.  But, all the while, cold dark clouds have descended over the land of the free.   In case you ever wondered - yes, they really did say it... [PT]   For example, Senator Mark Warner – an absolute goober – is currently running interference for the Democrats on a proposal to silence political...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com