Now I bet you are wondering about the historical precedence for a big slide on Fed day. Was yesterday’s overreaction typical?
I was able to check with the great data analysts at Bespoke Investment Group, and they provided some very compelling food for thought on that subject.
Bespoke said that this Wednesday was the worst Fed day for the market since September 21, 2011, when the S&P 500 fell 2.9%. So what kind of follow-through should we expect in the days ahead, and will the market continue lower or bounce back?
Below is a table, assembled by Bespoke, of all Fed days since 1995 that have seen the S&P 500 fall by more than 0.7%. Today was just the 20th time it has happened out of a total of 149 Fed days. As you can see in the summary, the S&P 500 has averaged a small gain of 0.06% on the day after these big down Fed days, with positive returns 58% of the time.
However, over the next week the S&P has bounced back significantly, with an average gain of 1.6%, and over the next month the average performance has been +1.5%. Over the next week and month, the S&P has been positive 74% of the time (14 out of 19).
Since the bull market began, the day after these down Fed days has been very negative, with market declines four out of five times. Yet over the next month, the S&P 500 has been positive five out of five times, with an average gain of 3.9%.
In summary: Since March 2009, while the market has struggled in the immediate aftermath of a down Fed day, it has not gone into a prolonged slump. Instead, according to Bespoke data, it has bounced back pretty quickly and in a big way.
This is good to know, and it will inform how we deal with it in our positioning. We will give the market a day to rest, and then prepare to play for upside.
Overall, my impression is that the knee-jerk reaction to the Fed decision and the chairman’s comments affected most stocks in the same way. I suspect the pushdown will be transitory, so I am not making any new short or put recommendations.
However, among the positions I would look at on the short side would be ones that pay relatively lofty dividends and are thus the most sensitive to a rise in interest rates. This would include the consumer staples stocks like Campbell (CPB) and Kimberly Clark (KMB), as well as real-estate trusts like Kimco (KIM) and Prologis (PLD) and electric utilities of all stripes.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage, which aims to capture profits of 15% to 40% and often as much as 100% to 200% in less than 90 days.
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