10/31/13 – Red Sox Win, Fed Stands Pat

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Oct 31, 2013 9:27:02 AM

and tagged Market Updates, Politics and the Economy

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The real news from yesterday is, of course, that the Boston Red Sox won the World Series at Fenway for the first time since 1918. Nothing else even comes close. End of post.

But, I should probably address other, relatively minor events as well. The big economic news yesterday was the release of the most recent Federal Reserve statement, which was almost identical to previous ones. The stimulus program continues unchanged, and the guidance remains very similar.

There were, however, a couple of differences that analysts noted—for lack of anything better to highlight. The first was the statement that the housing market had “slowed somewhat.” Housing has been a big part of the recovery so far, and a housing slowdown might hurt it. As I’ve mentioned before, I find the slowing healthy, but there’s no denying it might have short-term negative effects.

The second difference was the absence of the “tightening of financial conditions” statement from the mid-September release. Interest rates, especially mortgage rates, have dropped back, and the removal of this statement seems to reflect that. I suspect this is a distinction without a difference—the housing statement, to my mind, replaced the financial conditions statement—but other analysts see it as a more hawkish indicator.

The real elephant in the room of the Fed statement was the complete absence of any comment on the government shutdown or debt ceiling circus. I suppose there’s nothing really to say, but I have to think that the lack of data caused by the shutdown and the possibility of continued sequester spending cuts next year will make the Fed more cautious over any potential taper. The real takeaway from the statement is that no taper is imminent: the Fed will stand pat for the foreseeable future, which is what the market expected and wanted.

So, of course, stocks immediately fell and are falling again this morning. What’s up with that? A couple of things. First is normal volatility. The decline yesterday and this morning basically takes us back to the levels of . . . Monday. Second is the standard “buy the rumor, sell the news” scenario—shorthand for traders buying in anticipation of the market’s reaction to good news, then selling when it comes out. Anything common enough to have a saying around it probably isn’t a cause for worry.

I was talking with reporters yesterday afternoon who were asking about the selling. I said it was a very interesting indication of the state of market thinking, and could mean one of two things. First, with the almost uninterrupted run-up over the past three weeks, that more complacency was setting in; or, conversely, that people were getting nervous as a result of the run-up. I’ve heard signs of both, and that split again suggests to me that the Fed’s policy actions are a primary driver of market behavior. If “buy the rumor, sell the news” is, in fact, part of what’s behind the run-up and decline, it’s probably good for the market in the short run, as the Fed looks unlikely to taper this year, but not so good in the longer run, as tapering will inevitably show up at some point.

The other possibility is that the run-up was due to positive investor reactions to the earnings reports coming in. As of the end of last week, per FactSet, we know that the “beats” are pretty good, with 75 percent of companies reporting earnings above the mean estimate, while 52 percent reported sales above the mean estimate. The headlines have been positive, although the figures looking forward seem less so, which also may have influenced the selloff.

I’ll take a more detailed dive into earnings tomorrow, as we now have enough data to start doing some analysis, but today’s results were, in my opinion, driven by the Fed. No news, in this case, is good news for the stock market, even if the immediate reaction was negative.

Tonight, of course, I will be escorting a Jedi master on a quest around the neighborhood. I expect the returns on that quest to be excellent—every bit as good as those of the market have been.

Happy Halloween!

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