Industry Responses to Fed Policy Changes CFA Society Houston Wednesday, April 8, 2015 Julie R. Dahlquist, Ph.D., CMT 210-860-7048

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Presentation transcript:

Industry Responses to Fed Policy Changes CFA Society Houston Wednesday, April 8, 2015 Julie R. Dahlquist, Ph.D., CMT

We are living in unusual times….

Since 1950, the 3-month rate has been below 1% only 99 times. 22 times previously 77 times in the past 6 1/2 years Since 1950, the 3-month rate has been below 0.75% only 79 times. 2 times previously 77 times in the past 6 1/2 years Time FrameAverage 10 years1.39% 20 years2.59% 30 years3.64% 40 years4.91% 50 years 5.03%

FOMC Statement September 17, 2014 The Committee will determine the timing and pace of policy normalization-- meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels…

FOMC Statement October 29, 2014 December 17, 2014 January 28, 2015 March 18, 2015 The Committee currently anticipates that, even after employment and inflation are near mandate- consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

WHEN?

Three Steps and a…

Stumble

Gould’s rule  The market will suffer a substantial downturn after the Federal Reserve raises rates three consecutive times  George Schade (1991)  Early warning signal  Markets tend to advance for six more months  Expect bottom 18 months after signal

Recessions have been preceded by increases in discount rate

Gould’s rule

Gould’s rule--1994

Gould’s rule--2000

Gould’s rule--2004

Cyclical Investing and Trading Jim Cramer’s Mad Money 0% 1% 2% 3% GDP growth 1 st rate 1 st rate hike 2 nd rate hike 3 rd rate hike 4 th rate hike 1 st Fed easing buy financials buy metals and minerals buy medicine and supermarket sell financials

Do some sectors provide protection from the stumble? Daily returns since July, 1926 Kenneth R. French Dartmouth College

Mean returns around Gould’s three-step signal Stumbling before the step  Negative returns precede third rate hike  Predominantly positive results following hike

Mean returns around Gould’s three-step signal Annualized—Assuming 250 trading days

Median returns around Gould’s three-step signal

Annualized—Assuming 250 trading days

Financial Sector

Financial Sector Annualized—assuming 250 trading days

Financial Sector

Food: meat, dairy, bakery products, beverages, candy 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Mines: metal mining, gold, silver, iron, and copper ores 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Oil: oil and gas extraction, petroleum refining 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Clothing: yarn and thread mills, apparel, footwear, floor covering 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Durables: household furniture and appliances, musical instruments, toys, jewelry 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Chemicals: plastic material, synthetic resin, agricultural chemicals 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Consumer Goods: tobacco products, drugs, soaps, perfumes 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Construction: forestry, building contractors, paints, paving and roofing materials, hand tools 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Steel: iron and steel foundries 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Fabricated Products: metal cans, shipping containers, sheet metal work 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Machinery: engines, cranes, office computers, lab instruments 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Cars: motor vehicles, motor homes, bicycles, auto dealers 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Transportation: truck bodies, aircraft and parts, ship building, school buses 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Utilities: electric, gas, sanitary services, water supply 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Retail: department and grocery stores, eating and drinking establishments, florists 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Other: paper, periodicals, barbershops, advertising, cable TV operators 10-day pre5-day pre5-day post10-day post30-day post60-day post90-day post120-day post July 7, May 1, Jan. 21, Aug. 13, Sept. 9, March 3, Dec. 6, Apr. 19, May 1, Jan. 9, Dec. 5, Jan. 24, Nov., 15, Feb. 2, Sept. 21,

Gould’s signal  Market may anticipate rate increase  Historically, Fed has raised rates during a market decline  Traditional interpretation of Gould’s rule appears to work better during a strong market rally  Some sectors may offer protection when a Fed rate hike occurs

QUESTIONS?