Below are some of the most interesting things I came across this week. Click here to subscribe to our free weekly newsletter and get this post delivered to your inbox each Saturday morning.
STAT
Historically, a changing of the guard at the Fed has been a volatility-inducing event. “Since 1930, the S&P 500 Index has logged average drawdowns of 5%, 12%, and 16% over the one-, three- and six-month periods after a new Fed chief took the helm, according to data compiled by Barclays,” reports Bloomberg.
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And while there’s been a lot of talk of the growing threats to Fed independence, there has been little quantitative analysis of the likely consequences of that trend – until now. “When central bank independence weakens, the risks don’t stay theoretical: inflation volatility tends to rise, recession risk can increase, and equity valuations can come under pressure,” writes Bill Hester.
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Foreign investors, perhaps most sensitive to the costs born by the currency as a result of weakening Fed independence are massively overweight US equities. “A weaker dollar will reduce the weight of American assets in global indices, forcing benchmark-hugging investors to sell them. That will further weaken the greenback, feeding a vicious cycle,” notes The Economist.
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Already, the stock market is behaving in a way that suggests a changing of the guard of its own. “Through January 26, 62% of S&P 500 stocks have outperformed the index, the highest share since 2001… History urges caution. In three of the four prior years when more than 60% of stocks outperformed, the S&P 500 declined, with a median loss of 11.6%,” reports Ned Davis Research.
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Apparently, insiders don’t see this rotation as being the bullish phenomenon it is being made out to be by so many pundits. “Almost 1000 executives at roughly 6,000 US-listed firms have unloaded shares this month, compared with 207 who added, resulting in the highest sell-to-buy ratio in five years,” according to Bloomberg.
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