Investment Commentary – March 19, 2019

Year to Date Market Indices as of Market Close March 19, 2019
Dow 25,887 (10.97%)
S&P 2,832 (12.99%)
NASDAQ 7,723 (16.41%)
Gold $1,306 (1.18%)
OIL $59.08 (27.05)
Barclay Bond Aggregate (1.75%)
Fed Funds Rate 2.50% (last increase was 12/19/18)

What ‘Fed drift’ says about how the stock market behaves around policy meetings

New York Fed research finds equities have seen gains, on average, around meetings with news conferences

Stocks ended marginally lower Tuesday as the Federal Reserve began a two-day meeting — but if the market manages to score a gain over the next two days, bulls might want to give credit to “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.

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.

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, -0.01% 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.

Alliance Bernstein Commentary: THE WEEK IN MUNILAND


US inflation for February was a touch softer than expected, with core CPI rising 0.1% month over month and
2.1% year over year.

Why it matters: With the Fed already comfortably on hold, there is no near-term policy implication
from this week’s print. From a macro perspective, the biggest question remains whether a strong
labor market will eventually feed through to higher inflation. That question remains unanswered,
leaving us to await further information before drawing any conclusions. That’s what the Fed is doing,
and we think it’s the right approach.

Year to date, record inflows into municipal mutual funds of $19.5 billion have caused munis to outperform
treasuries. In fact, 10-year AAA municipals have returned 2.05% while comparable-maturity US Treasuries
have returned 1.39%.

Why it matters: This outperformance has reduced the after-tax yield benefit of 10-year AAA
municipals versus 10-year US Treasuries to just 0.51%, compared to the long-term average of
0.94%. This differential is just 0.09% away from putting 10-year munis at their most expensive
levels in history. Investors should consider allocating a portion of their tax-exempt municipal
allocation to 10-year US Treasuries until such time as the after-tax spread reverts toward normal.

Around the web:

Fed ahead: The U.S. Federal Reserve is expected to keep interest rates unchanged on Wednesday when it concludes a two-day policy meeting, just as it did at its most recent meeting in late January. Many economists now believe the Fed is unlikely to approve any rate hikes this year, unless there’s a reversal of a recent weakening trend in economic data.

Momentum regained: After falling for five days in a row in the previous week, the major U.S. stock indexes recaptured their positive momentum from January and February. Information technology stocks led the rally as the NASDAQ climbed nearly 4%, the S&P 500 added about 3%, and the Dow rose around 1%.

Restrained inflation: The latest monthly reading on U.S. inflation shows that prices remain stable—a trend that aligns with the U.S. Federal Reserve’s current neutral stance on interest-rate policy. The Consumer Price Index rose 1.5% in February on an annualized basis, the slowest pace since September 2016.

Divergent paths: Performance gaps between the major indexes were large, with the Dow trailing its peers by a wide margin. One reason was the nearly 10% weekly decline for Boeing, one of 30 stocks in the index. Its shares slid in the wake of a deadly crash of a Boeing 737 MAX in Ethiopia.

Other Notable Indices (YTD)
Russell 2000 (small caps) 16.29
EAFE International 11.04
Emerging Markets 10.72
Shiller Annuity Index 6.68

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.

Click to access 03-18-19-The-Week-in-MuniLand.pdf