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:

  • Punch-Drunk Investors & Extinct Bears, Part 1
      The Mother of All Blow-Offs We didn't really plan on writing about investor sentiment again so soon, but last week a few articles in the financial press caught our eye and after reviewing the data, we thought it would be a good idea to post a brief update. When positioning and sentiment reach levels that were never seen before after the market has gone through a blow-off move for more than a year, it may well be that it means something for once.   Sloshed as we are...   a...
  • Quantum Change in Gold Demand Continues - Precious Metals Supply-Demand Report
      Fundamental Developments In this New Year’s holiday shortened week, the price of gold moved up again, another $16 and silver another 29 cents. Or we should rather say the dollar moved down 0.03mg gold and 0.03 grams silver. It will make those who borrow to short the dollar happy...   Let’s take a look at the only true picture of the supply and demand fundamentals for the metals. But first, here are the charts of the prices of gold and silver, and the gold-silver...
  • Why You Should Embrace the Twilight of the Debt Bubble Age
      Onward Toward Default People are hard to please these days.  Clients, customers, and cohorts – the whole lot.  They’re quick to point out your faults and flaws, even if they’re guilty of the same derelictions.   The age-old art of assigning blame – in this case complemented by firm knowledge of the proper way to prosperity (see lower right corner). Jack Lew not only sees the future with perfect clarity these days, he also seems to have spent his time as treasury...
  • As the Controlled Inflation Scheme Rolls On
      Controlled Inflation American consumers are not only feeling good.  They are feeling great. They are borrowing money – and spending it – like tomorrow will never come.   After an extended period of indulging in excessive moderation (left), the US consumer makes his innermost wishes known (right). [PT]   On Monday the Federal Reserve released its latest report of consumer credit outstanding.  According to the Fed’s bean counters, U.S. consumers racked...
  • Punch-Drunk Investors & Extinct Bears, Part 2
      Rydex Ratios Go Bonkers, Bears Are Dying Off For many years we have heard that the poor polar bears were in danger of dying out due to global warming. A fake photograph of one of the magnificent creatures drifting aimlessly in the ocean on a break-away ice floe was reproduced thousands of times all over the internet. In the meantime it has turned out that polar bears are doing so well, they are considered a quite dangerous plague in some regions in Alaska. Alas, there is one species of...
  • 2018: The Weakest Year in the Presidential Election Cycle Has Begun
      The Vote Buying Mirror Our readers are probably aware of the influence the US election cycle has on the stock market. After Donald Trump was elected president, a particularly strong rally in stock prices ensued.  Contrary to what many market participants seem to believe, trends in the stock market depend only to a negligible extent on whether a Republican or a Democrat wins the presidency. The market was e.g. just as strong under Democratic president Bill Clinton as it was under...
  • Cryptonite 2
      Relative Scarcity and Bubble Dynamics There is widespread awareness about the relative scarcity of BTC compared to the ever-expanding fiat money supply, but it seems to us that the dynamics underlying their relationship are largely ignored. The scarcity argument underpins a lot of speculative activity in BTC and other cryptocurrencies – hence ignoring the related dynamics is probably not a very good idea.   One of the features of bitcoin people find enticing  - by no...
  • Cryptonite
      The Wingsuit Test of 1912 Late last year press reports informed us that by October, the number of active accounts at US cryptocurrency exchange Coinbase* had exceeded the number of accounts at Charles Schwab, one of the oldest US discount brokers, by 1.1 million. The report was dated November 27, by which time the number of accounts had just soared by another 1.6 million. We felt reminded of the final few weeks of China's stock market bubble, which saw similarly stunning growth in retail...

Support Acting Man

Top10BestPro
j9TJzzN

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]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com