Investment markets are serenely making their way through the current trading week. Stocks are calmly drifting higher, bond yields have steadied and even the woebegone metals market has shown some renewed signs of life. This market tranquility is thanks in part to the fact that the event calendar is generally light in a quiet volume summertime market. And while we do have a healthy slate of corporate earnings reports this week, these have become less market moving and more company specific events in this time of quantitative easing. But investors should avoid becoming complacent amid the recent quiet of investment markets, for two major blockbuster events are on the calendar for next week. And both have the potential to move the markets across a broad range of asset classes in a meaningful way.
Next Wednesday, July 31: Statement Following FOMC Meeting
The first major event scheduled for next week is the latest gathering of the QE squad at the U.S. Federal Reserve next Tuesday and Wednesday. This meeting is one that will not be followed by a press conference next Wednesday afternoon so investors will instead be anxiously scouring the Fed statement following the meeting for any clues as to exactly when the Fed plans to begin scaling back on asset purchases. While many have suggested that the market has already become comfortable with the idea of QE tapering starting in September, has it really? I would have expected that the market was at least prepared for the idea that the Fed was simply considering the idea of tapering when they concluded their meeting on June 19, as Chairman Bernanke basically came out and said as much during his Congressional testimony back on May 22. But the market had a complete fit once he brought up the idea at his June 19 press conference, so it would be premature to conclude that markets have adjusted for anything at this point.
Thus, two factors will be critically important once the Fed statement is released next Wednesday afternoon. The first is what the Fed says in the statement. The second is how the market reacts to it. To this latter point, Chairman Bernanke could essentially read the same exact speech lately on three different trading days and get three entirely different dramatic market reactions. In short, investors should be prepared for volatility if nothing else next Wednesday afternoon.
But what exactly might we expect. Below is a chart showing the returns for several key investment market asset classes on the day when the Fed has recently concluded an FOMC meeting. These asset classes include stocks (NYSEARCA:SPY), long-term Treasuries (NYSEARCA:TLT), gold (NYSEARCA:GLD), silver (NYSEARCA:SLV) and copper (NYSEARCA:JJC).
In the months since the euphoric response to the official announcement of QE3 by Chairman Bernanke following the September 13, 2012 meeting, investment markets have become much more wary of the FOMC.
Stocks have been down four times on the day of the last six Fed meetings including daily declines of -0.9% and -1.4% following the conclusion of the last two sessions on May 1 and June 19. This performance is actually quite good relative to the experience of the others, however.
Bond market returns have been downright dismal on recent FOMC days, with long-term Treasuries falling in five of the past six instances including declines of -1% or more on four occasions.
And while the FOMC days were once good for precious metals, they have turned nasty in recent months.
For gold , it has fallen on the last three FOMC days including declines of more than -1.1% on May 1 and June 19. This has been particularly hard on the gold miners (NYSEARCA:GDX), which have declined by -2.3% and -3.2%, respectively, following the last two Fed meetings.
As would be expected, silver has struggled even more than gold on recent FOMC days. Silver initially was enjoying positive returns following the October 24, December 12 and January 30 meetings including gains of +1.4% and +2.0% for the last two sessions. But the tide has turned strongly against the white metal since, with declines following the last three Fed meetings including a -2.6% drop on May 1 and a -1.3% decline on June 19. This has taken its toll on the likes of Silver Wheaton (NYSE:SLW), which has followed silver lower by -1.3% and -2.4%, respectively, on these last two Fed days.
Copper had once been by far the best Fed day performer, but this trend has changed dramatically in recent months. After posting an average gain of roughly +1% following the previous four Fed meetings, copper plunged by nearly -4% following the FOMC's May 1 session. And while it was the best relative performer in the wake of the June 19 meeting, it was still down -0.5%. This has weighed on the likes of Freeport McMoRan (NYSE:FCX), which held up better than the red metal on May 1 with a -0.2% decline but fell by -1.1% on June 19.
Thus, the trend over the last seven Fed meetings since last September has been for markets to move lower almost across the board on the day an FOMC meeting comes to an end. At minimum, investors should be prepared for heightened volatility next Wednesday, as the average price movement in either direction for these asset classes has been 1% on Fed days.
Next Friday, August: The July U.S. Employment Report
The second major event scheduled for next week is the release of the latest employment report for the month of July. Just as with the Fed meeting, two factors will be critical once the jobs numbers are released at 8:30AM next Friday. The first will be the actual report and whether it is better than expected, worse than expected or on par with expectations. The second will be how the market chooses to react to the numbers. Will good news be good news or bad news for the market? Will bad news be good news or bad news? And how will these perceptions be shaped by what the Fed says next Wednesday just prior to the employment report on Friday morning.
The following is a chart showing the returns for the same set of asset classes on the day the monthly employment report has been released.
Overall, asset class performance has recently been widely divergent once the job numbers come out.
Stocks have recently loved jobs day regardless of the numbers. Stocks have advanced in seven of the last eight instances including a +1% gain following the last three employment reports. And given recent market performance over the last few weeks, stocks appear to still be very much in the mode of taking any kind of employment news and making it positive for stocks. Of course, a lot can happen between now and next Friday, but if the employment report is good enough, bad enough or just right, stocks may find their way higher once again.
Bonds, on the other hand, have been getting absolutely crushed on jobs day. Not only have bonds declined on seven of the last nine days when the employment report was released, but the magnitude of the declines has been considerable. For example, long-term Treasuries have fallen by more than -1% in five of the last six instances including drops of -2.4%, -1.8% and -3.4% following the last three reports. Thus, investors should be ready another rough day for bonds next Friday unless sentiment begins to shift dramatically.
And while jobs day was once kind to the metals complex, it has been brutal over the last couple of months. Following the employment reports released in December to May, gold , silver and copper were all briskly higher in all but a small handful of instances with average gains of +0.32%, +0.78% and +1.40%, respectively. But following the last two job reports, these same metals have been absolutely savaged from the moment the employment numbers hit the headlines with gold down over -2% in each instance, silver down between -4% to -5% both times and copper down nearly -2% in June and over -3% in July. As would be expected, these declines in the metals once again took a heavy toll on related positions such as the gold miners (down -4.3% and -3.1%, respectively), Silver Wheaton (down -2.5% and -1.9%) and Freeport McMoRan (down -0.3% and -1.2%)
Summing this all up, the trend over the last nine employment report days has been for stocks to move sharply higher, bonds to fall precipitously lower and for the metals complex to move sharply one way or another. But once again, just as we have seen with Fed days, investors should be prepared for more volatility next Friday, as the average price movement in either direction for these asset classes has been 1.4% on job days.
So enjoy the relative market calm these last few days, for next week promises to bring a major dose of volatility with the blockbuster one two punch from the FOMC on Wednesday and the monthly employment report on Friday.
Disclosure: I am long GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am long U.S. stocks via the VOO, IJR, XLI, XLF and VNQ. I am also long gold via the PHYS. Short-term holding periods are set on all current positions.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.