Financial commentators love to speculate: “What will the Fed say?” What will it do?”
Surely, the health of the stock market hinges on the answers.
Not so. Market history shows again and again that the stock market does not take its marching orders from the Fed.
Let’s go back to 2015 for a case in point. As Robert Prechter recounts in his landmark book The Socionomic Theory of Finance:
The Fed’s irrelevance to the stock market applies even on volatile days. Consider what happened on October 28, 2015. The stock market closed up on the day, and headlines attributed the rise to investors’ bullish reaction to the Fed’s post-meeting announcement, issued at 2:00 p.m. ET. The chart below negates that claim:
The S&P futures contract gapped up on the opening, rose until the very minute of the announcement, plunged 23.5 points immediately thereafter, and then rose until the close. Extrapolating the pre-announcement trend from the peak of the opening one-minute bar to the peak at 2:00 p.m. takes it exactly to the session’s closing price. One can better describe the day, then, as naturally rising but with a temporary interruption due to a bearish reaction to the Fed announcement. If that’s what happened, then one must conclude that the most powerful financial institution in the world had no more effect on stock prices than an 18-minute midday disruption with no net effect on the trend. But wait. If speculators reacted bearishly to the “shock” of the Fed’s announcement, what news made the market rise thereafter? No one cited any. Exogenous cause still doesn’t explain the day’s action.
Irrelevant Fed “shocks” have played out time and again.
So, if Fed announcements or other news and events do not determine the stock market’s trend, what does?
Hint: The stock market is people, and their behavior follows patterns. We track those patterns.
