What Investors Care About
Estimated reading time: 5 minutes
Starting from Hero, Got Nothing to Lose
Tracy Chapman’s return to the stage to perform her 1988 song “Fast Car” made major Grammy headlines this week. Given the splash of the entire awards show, some other big 2024 Grammy moments are sprinkled throughout the paragraphs that follow because, well, music is life.
I replaced “zero” with “hero” in Tracy’s lyrics for the title of this blog, with the hero being Jerome Powell… at least as of right now, according to markets. For all of the attention we give to the Federal Reserve, I thought it would be interesting to see if we can glean any insight from what the market is really taking its cues from; more specifically, to see if what the market cares about has changed over the last couple years.
What made me curious about this was the commentary from Powell last week — in the FOMC press conference and the 60 minutes interview that followed over the weekend — which took a March rate cut off the table, yet got an uncharacteristically muted response from the market, IMO.
Do we not care as much about cuts as we thought?
Jobs Can Love Me Better Than Inflation Can
There’s a first time for everything, and this economic cycle has seen many firsts. Miley Cyrus also saw her first ever Grammy for “Flowers”; her excitement for herself, and for receiving the award from the Goddess of Pop Mariah Carey, was contagious. As someone who grew up during the Mariah Carey era, that got me feeling emotions.
The lyrics to Flowers can probably be repurposed for an endless amount of columns, but in this section I’ll use them for what we found changed over the last couple of years. As it turns out, the reaction that the S&P 500 has had on the days of certain data releases has shifted since the beginning of 2022, with labor data now taking center stage and inflation data shrinking into the background.
The intraday max and min returns for each data point, and compares the reactions during 2022 with those in 2023, as well as the beginning of 2024. Evidently, CPI reports are no longer as volatility-inducing, with the widest intraday return spread falling from 10.2% in 2022 to 3.4% in 2023-2024. Meanwhile, jobs reports have maintained their ability to induce volatility, with the widest intraday return spread only moving from 5.4% in 2022 to 4.4% in 2023-2024.
I suppose this makes sense given the market’s reduced concern over inflation as it has come down, but keep a watchful eye on labor markets as many continue to warn about looming weakness.
This dynamic does beg the question though, are markets too complacent about inflation, or is it fair to move on from it as a decision making factor? If inflation re-accelerates, will investors be caught flat-footed?
Turn the Lights Back On
Speaking of re-acceleration, Billy Joel released his first single in 30 years titled “Turn the Lights Back On” and re-emerged from behind the piano to perform it on Sunday night. Between him, Tracy Chapman, Joni Mitchell, and Celine Dion, emerging from the shadows was definitely a theme from the Grammys this year.
Despite inflation data perhaps retreating into the shadows, we did find that FOMC statements continue to take center stage for markets… although not quite as important in 2023 as they were in 2022.
Perhaps markets have hit a point of news exhaustion. We’ve heard so much for so long, we’re just used to it now and less reactionary.
I think that’s probably the case, until something surprises us. Given the Fed’s continued influence over volatility in the S&P and the Treasury market, I’d point to a surprise in inflation data that causes a surprise move by the FOMC as a high risk event. More specifically, an unexpected resurgence in inflation that would cause the Fed to… wait for it… turn the tightening lights back on.
For now, the hiking cycle clock has struck midnight, and Taylor Swift once again struck gold by becoming the first artist ever to win Album of the Year four times with “Midnights”. If only we could get Taylor to write an album about monetary policy… guessing that one wouldn’t win many awards. Or would it?
Maybe the market’s next cue won’t be macro data at all, but something more company or industry-specific. It’s impossible to know, but what I do know is that for the time being, no matter what the news is, there are still buyers out there.
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