Stocks Take Taper in Stride as Even Greenspan Sees DropMichael P. Regan
Fed days just ain’t what they used to be for the stock market.
Some of the most eye-popping moves in the last six years occurred on days when the Federal Reserve announced its policy decision.
When the central bank cut its benchmark rate to a range of 0.0 to 0.25 percent and said it was ready to expand purchases of mortgage debt on Dec. 16, 2008, it was good for a 5.1 percent rally in the Standard & Poor’s 500 Index. Each of the next three announcements saw a daily gain of more than 2 percent as the Fed said, in effect, look we’re not kidding and we’re also going to start buying Treasuries like crazy.
All told, the S&P 500 has averaged an advance of 0.48 percent on Fed days since the central bank lowered its benchmark rate to near zero in 2008, according to Bespoke Investment Group LLC. The gain has been 0.35 percent on average since the Fed began releasing policy decisions on the same day as their meetings in 1994, according to Bespoke. That compares with an average advance of 0.03 percent on all days in market history, the firm said.
Not surprisingly, the Fed’s plans to take its foot off the gas pedal has meant fewer eye-popping gains. But what may be surprising -- or, again, not surprising, given the economy just put up 4 percent growth on the scoreboard -- is that Fed days haven’t been a disaster since the central bank began back-pedaling on stimulus.
The first two meetings of 2014 saw declines of 1 percent and 0.6 percent, respectively, followed by gains of 0.3 percent and 0.8 percent. That averages to a daily loss of 0.1 percent on Fed days for the year so far, or a gain of 0.2 percent if you start with the December meeting when the first bond-purchase reduction was announced.
Yet the average Fed day return on stocks began flattening long before tapering of bond purchases began. “Performance has been sideways” on decision days for 20 months, according to Bespoke.
“We feel that the ‘lower for longer’ forward guidance mitigates some of the effects of the taper, which is one of the reasons that the withdrawal of stimulus hasn’t been harder on equity prices,” Bespoke wrote. The market remains in a “Bernanke-locks zone,” the firm said, mashing up the former Fed chief with famed bear-den squatter Goldilocks, who presumably would find this economy not too hot or too cold for her liking.
As long as we’re bringing up former Fed chairs, we might as well drag Alan Greenspan into this and ask: Have the Fed’s low rates and bond-buying binge caused stocks to rise too high, as many worry?
Greenspan prefers the equity premium model, which compares the earnings yield on equities to rates on government debt. At 5.5 percent, the S&P 500’s earnings yield is about three percentage points higher than the 10-year Treasury rate.
“I would not say we are grossly overpriced right now in a historical context,” Greenspan told Bloomberg Television this morning.
Still, like many market watchers, he said the stock rally will see a significant correction “somewhere along the line” because equities have risen so sharply for so long.
Also like many market watchers, he said he has no idea when.