Fed Day is great for traders, not so much for investors

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If the purpose of a press conference by Fed Chairman Jerome Powell is to avoid excessive market volatility, it fails miserably, said Jim Paulsen, strategist at Leuthold Group.

The theory is that more transparency and communication will have a calming effect, but the numbers do not confirm this.

“We looked at stock and bond market performance from 2001, differentiated by ‘In the Fed window’ periods (a total of five days: two before and two after the day of the Fed’s announcement) vs. ‘Outside the Fed Window.’ (the rest of the trading days),” Paulsen wrote in a note.

“The S&P 500 (SP500) (NYSEARCA: SPY) suffered an average annualized daily loss of -14.62% on “Fed Window” trading days, compared to +10.20% annualized daily gains the rest of the time,” he noted.

“Bond yields (US10Y) (TBT) (TLT) have been rising throughout the 2001 to date period in question, but they have risen much more aggressively “within” Fed windows. On a daily basis On an annualized average, bond yields rose at a 166 basis point pace during the five-day federal windows, as opposed to a 112 basis point run otherwise.”

“Not only are stock and bond returns dramatically worse around these Fed meetings, but so is financial market volatility,” Paulsen said. “For example, the standard deviation of daily percentage changes in the S&P 500 is almost 20% more pronounced during Fed Windows than the rest of the time (i.e. 1.3% vs. 1.1%). “

“Similarly, the standard deviation of 10-year daily return changes was slightly higher by 13% ‘inside’ windows compared to outside (i.e. 6.28% versus 5.55% )”, he added.

“If you’re a trader, take advantage of the gift of Fed Day. But, if you’re an investor, hold your nose and realize that we’re only a few days away from being ‘out again’. the Fed window!””

After today, what is the Fed’s next move?

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