Introducing the "Fed Thrust"
I believe it was Marty Zwieg in the early 1980’s who first popularized the phrase "Don’t Fight the Fed." If you want to understand the stock market in the most basic down and dirty terms imaginable, those words are "money moves the market.” When money is easily available and when stocks have little other competition (typically due to low or declining interest rate and/or low and/or declining inflation) "good things happen" in the stock market. The corollary to "Don’t Fight the Fed" is "When the Fed is pumping, stocks are jumping."
Let’s look at some recent examples. Roughly Wednesday at https://fred.stlouisfed.org/series/TREAST the securities holdings of the Fed is reported. A subjective, anecdotal glance at the performance of the S&P 500 Index compared to the growth of Fed assets seems to show that when the Fed is acting decisively – either expanding or contracting its holdings – the market reacts accordingly.
Fed Assets versus S&P 500 Index
Now let’s look at things on a more objective basis.
A = 6-week % change in Fed assets
B = Average of A (1.42%)
C = Standard deviation of A (5.35%)
D = B + C (6.77%)
The chart below displays A (the 6-week rate-of-change in Fed Assets) in blue and D (the 6.77% level) in orange.
6-week % change in Fed Assets
What we will examine next is what happens to the S&P 500 Index when A pops above D for the first time in the most recent 26 weeks. For lack of a better phrase, I refer to this as a "Fed Thrust."
One word of caution: we are talking about a very small sample size of 3 occurrences, the first happening in 2009. Still, given that major Fed action is not something that happens all that often historically, and given that "Don’t Fight the Fed" was a "thing" long before the data in this chart started, the results may be somewhat compelling.
S&P 500 % +(-): 26-weeks after each Fed Thrust
The chart below shows the S&P 500 Index cumulative price performance if held ONLY during the 26 weeks following the 3 Fed Thrusts listed above.
S&P 500 Index after Fed Thrusts
Again, "Fed Thrusts" as defined above don't happen very often, and the history is pretty short and involves a small sample size. But what history it has lends more evidence to the notion that Marty Zweig got it right way back when.