I have observed that the Non-Farm Payroll economic release
and the FOMC Rate Decision are usually days that mark the end of the prevailing
stock market trend. I believe this is essentially a fundamental, rather than
The prices of the stock market are related to these five
essential macroeconomic factors: consumers spending and savings, the business
cycle, fiscal policy, and monetary policy. Of these, the market seems to
acknowledge consumer habits and monetary policy to be the most important
factors. The former is represented by payroll data, and later by interest rate
policy. (The weight of two of the ten leading economic indicators, related to
monetary policy, has accounted for 40-60% of the index.)
There is a consensus view of the employment data and the
rate decision, and as the release approaches, the market tends towards the
valuation “justified” by the coming data. This is just like a stock price
rising in anticipation of an earnings announcement. Once the data is released, “sell
the news”—the data becomes fully discounted and the trend towards the next
release, a month or quarter later, begins.
That is one very viable explanation for this trend reversal
phenomenon that occurs consistently in the stock market. That prices did not
reverse after last Friday’s payroll data, and will reverse at or near the Fed
announcement, tells me that the financial markets are currently more concerned
with interest rate policy than the economy. Changes in this policy can create a
change in investor mind-set that governs the next long term stock market trend.
Why is monetary policy so important? It affects the economy
and inflation, and also the supply and demand for investments—bonds versus
stocks. I will end this brief essay with an excerpt from a brilliant and
eye-opening passage, taken from the book, Inside
the House of Money. Read it carefully, and many times, and return to it in
There is only one true macro
trade, and that’s the price of money. Everything else is a function of the
price of money.
banks control the price of money and drive everything with their central bank
rate. They use monetary policy to get supply and demand moving in the economy
by encouraging people to move out along the risk curve. The risk curve, in
essence, is the credit curve.
really only one central bank and that’s the U.S. Federal Reserve. The Fed sets
the price of money.
practice, the price of money is not the Fed’s overnight rate, but the interest
rate that corporations use to evaluate investment opportunities. I would argue
that’s the 18-month and two-year interest rate. From there, you move out along
the risk curve to government bonds, corporate bonds, and then to equities. At
the tail end, you have foreign exchange fanning out.