Stocks remained on the upswing Tuesday as the Federal Reserve began a two-day meeting — and bulls might want to give credit to the “Fed drift.”
In a note, Nicholas Colas, co-founder of DataTrek Research, reminded clients of the phenomenon studied by New York Federal Reserve Bank. They found that equities have tended to rally into and through meetings of the Fed’s rate-setting Federal Open Market Committee.
Tuesday “is Day 1 of the Fed Drift sequence, and in an evermore algorithmic world that’s important to know,” Colas wrote, referring to pattern-based trading programs.
Read: Here are 3 things to watch when the Fed unveils its latest dot plot
The New York Fed researchers, using data running from 1994 to 2011, showed that equities rose, on average, the afternoon of the day before, and then more sharply on the morning of FOMC announcement days. After the announcement at 2:15 p.m. Eastern, equity prices may have fluctuated depending on the details of the announcement, but, on balance, ended above their pre-announcement level and almost 50 basis points above where they opened the day before. (Read the New York Fed’s latest paper on the phenomenon here.)
The pattern changed in 2011, when the Fed chairman began hosting news conferences at every other meeting — gatherings that were also accompanied by the release of updated economic projections by FOMC members. The researchers found that the pattern disappeared for meetings without a news conference, but the upside bias continued around announcement days that did include a news conference. (See chart below.)
Federal Reserve Bank of New York
Federal Reserve Chairman Jerome Powell in January began a new policy of holding a news conference following each meeting. As Colas notes, however, the researchers found it was unclear whether investors between 2011 and 2018 were responding to the news conference, the new economic projections, or both.
The Fed’s January 2019 meeting saw the Fed make a dovish about-face, putting rates on hold, but didn’t offer any new projections. The S&P 500 index SPX, -0.11% rallied 2.4% from the open on Jan. 29, the first day of the meeting, through the close on Jan. 31, the day after the meeting concluded.
Stocks trimmed earlier gains, but the S&P 500 remained up 0.3% in afternoon trade, while the Dow Jones Industrial Average DJIA, -0.15% advanced around 53 points, or 0.2%.
“Markets expect to see a more dovish set of interest rate projections on Wednesday, and a still-patient Chair Powell. All the recipe items to see a Fed Drift, in other words,” Colas said. “He may also give more color on the endpoint for the Fed’s balance sheet unwind. This would also be a positive for stocks.”
See: Fed seen revealing ‘how and when’ it will stop shedding balance sheet assets
