Fed Policy Has Contributed to Turnaround in Market Sentiment
NEW YORK ( TheStreet) -- In testimony to the Joint Economic Council last May, Federal Reserve Chairman Ben Bernanke stated that the FOMC has made it clear, "it is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes." Alongside additional answers he offered concerning the rationale and timing of such tapering, the financial markets immediately swooned. Through June, the 10-year Treasury yield jumped nearly 60 bps (and it would go on to rise an additional 40 bps after that). Different 30-year mortgage rates also jumped 100 bps (or 1%) in total. The stock market fell nearly 7%.
A number of Federal Reserve officials had immediately and ever since come out to distort and negate some of the chairman's communications, in an attempt to reduce the apparent runaway rise in borrowing costs, particularly on shorter-tenured bonds. The 10-year Treasury yield is now hovering near 2.7%, and the stock market has rallied nearly 15% since its bottom in June. Some are now openly (and some are now quietly) questioning to what degree financial markets are benefiting solely as a result of continued Federal Reserve actions, from the avoidance of reduced asset purchases (i.e., tapering), through Janet Yellen's insistence in November testimony that unconventional policy is needed for some time.
In this note we look at this performance, since June. And we show the impact that the Federal Reserve's policy has contributed to this turnaround in the market sentiment that had soured by June, relative to the normal market behavior we could have expected. Surely there are other hypotheses we could add for the unusual take-off in the equity markets, from the labor markets improving, to inflation remaining low, to valuations coming in line with historical norms. But we also do know that growth, revenue and earnings have all been just OK throughout the year. Five of these factors (employment, inflation, growth, revenue and earnings) at their slow, single-digit annualized rate of growth do not support such a large ongoing rise in equity markets. And the sixth other factor (valuations) is not a good reason at all but rather a reverse-engineered excuse to make the sudden rise in equity prices seem OK. Thus it makes sense that the Federal Reserve has had an outsized role in changing the trajectory of market performance, since June.
Nov. 15 is 1.5 quarters, or 4.5 months since June, a period we will call "Post." The Post period this year has been 138 calendar days, and 98 trading days. The 4.5 months, through June, we will call "Pre." Starting in mid-February, the Pre period this year has also been 138 calendar days, but 95 trading days. By a range of statistical tests (both parametric such as the the test for differences in means and in variance, and semi-parametric such as the Anderson-Darling or Kolmogorov-Smirnov), the Post period has performed better, but not in a statistically significant way.