The Federal Reserve Open Market Committee (FOMC) will be meeting today, for the second time this year, in what may prove to be one of the most important events for the stock market so far this year.
Following Chairman Ben Bernanke's recent semi-annual testimony on monetary policy before the House Financial Services Committee on 2/29/2012, no indication was given for any further monetary easing. Along with reference to temporary oil driven inflationary pressures, and a faster improvement in employment than expected, catalysts converged causing the U.S. dollar to spike higher and gold and equities to retreat on 2/29/2012.
Prior to Bernanke's testimony, the S&P500 index had closed at 1,372.18 on 2/28/2012. Following the testimony, the index closed down 0.5% at 1,365.09 on 2/29/2012. Since then, the markets have been basically marking time, awaiting for possible clues for the FOMC's outlook, with the S&P500 closing yesterday at 1,371.09, almost the same level it was at prior to Bernanke's testimony.
Given recent economic strength and a drop in unemployment, technology shares have performed quite well year-to-date. However, the majority of gains have been generated during the first two months of the year, with the technology heavy NASDAQ-100 index trading slightly higher during the past two weeks, closing at 2,646.85 on 3/12/2012 from its close of 1,633.46 on 2/28/2012.
Due to their cyclical nature and economic conditions sensitivity, technology shares could still have additional upside potential as the economy continues to perform quite well, growing 3% during the last quarter, while the latest employment numbers continue to be quite encouraging. However, recent hesitation in further gains could have been attributed to uncertainty regarding P/E multiple expansion or contraction as a result of FOMC monetary policy.
In an article we published 8/29/2011, "The Bernanke effect on widely held stocks", it was concluded that in general, the technology/internet stocks examined increased an average of about 1.53% during the two weeks following the day prior to the FOMC meeting (for FOMC meetings held between August 10, 2010 and August 9, 2011).
The technology/internet stocks examined included CSCO, IBM, INTC, MSFT, HPQ, AMZN, NFLX, AAPL, GOOG, YHOO, DELL, and EBAY. Since then, there have been 4 scheduled FOMC meetings (9/20-21 2011, 11/1-2 2011, 12/13/2011, 1/25-26 2012), in addition to an unscheduled meeting on 11/28/2011. As an update to our previous findings, we examined the most recent change in technology/internet stocks following such meetings.
Average 2-week price change during last 4 FOMC meetings
Number of periods where stock price increased ("up-periods")
Number of periods where stock price decreased ("down-periods")
Up-periods average stock price increase
Down-periods average stock price decrease
On average, during the past 4 FOMC meetings, the examined technology/internet stocks fell an average of 0.88% from the day prior of the meeting, to the day two weeks following such meeting. However, when excluding the meeting in September, hence excluding volatile September/October data, such stocks actually increased by an average of 1.81%. It should also be noted that when separating technology stocks from internet stocks, technology stocks (CSCO, IBM, INTC, MSFT, IBM, AAPL, DELL, HPQ) increased by an average of 0.79% when excluding October, while internet stocks (YHOO, NFLX, EBAY, GOOG, AMZN) increased by an average of about 3.24%, driven by a 12.08% average increase in NFLX.
There is no question that there are substantial factors that have affected the stock prices of the examined companies other than the FOMC meeting. However, knowing such nuance, as in our findings in August, and when excluding the volatile October data, it does seem that in general technology/internet stocks perform well in the two weeks following FOMC meetings.
Today's meeting is quite important as it will either confirm a possible hesitation by the FOMC for further easing, or it may mirror recent past meetings whereby the FOMC may conclude that despite recent economic strength, the unemployment rate of 8.3% is still too high, while inflationary pressures are temporary due to energy prices.
As the possibility of a suspension of monetary easing is already somewhat expected following Bernanke's recent testimony, there is a very good likelihood that technology stocks will appreciate following today's meeting (at least for next few weeks). This is contingent on the Federal Reserve abstaining from making a major policy shift, whereby they may back away from their prior commitment of maintaining current low rates through 2014; however we believe such scenario has a very low likelihood of occurring.
In addition, should the FOMC open the door to monetary easing again, then such appreciation in technology stocks could be quite substantial, possibly exceeding the recent referenced average of +1.81%.
Disclosure: I am long QQQ.
Additional disclosure: I may also initiate other long options positions in technology and internet stocks during the next 72 hours