In the next few hours we get the confluence of three major events, any of which has the potential to move markets significantly. Monetary Policy, Earnings, and Fiscal Policy have all contributed to lift markets since the depths of the Covid crisis. Today and tonight we get major insight into all those elements.
For starters, at 2PM (all times Eastern Daylight) we get the latest interest rate decision and policy statement from the Federal Open Market Committee. While few expect any meaningful changes to interest rate policy or guidance, investors will be scrutinizing Chair Powell’s ensuing press conference for clues to the timing and magnitude of any potential changes to monetary policy. Despite repeated assurances from the Chairman that the Fed remains committed to a “lower for longer” policy, reporters will undoubtedly probe the nuances about transitory inflation and full employment. The last Fed meeting concluded on March 17th. The S&P 500 Index (SPX) rose .29% that day but fell 1.48% the next. The prior meeting concluded on January 27th. SPX fell 2.57% that day.
The chart below shows the movements in SPX on the meeting day and the following day for the past year. We can see that there are several days with above average volatility, including some substantial declines that occurred in the midst of a steadily rising market. FOMC meetings can bring volatility, sometimes on the day of the meeting, sometimes after investors had an evening to think about them.
After the close today, we then get results from the largest component in SPX and NDX. Apple (AAPL) makes up about 6% of SPX and about 11% of NDX. Unlike yesterday, when results from Microsoft (MSFT) and Alphabet (GOOG, GOOGL) caused the stocks to move in opposite directions, essentially neutering their effects on the indices, AAPL stands alone. A significant move in either direction will have an influence on the indices tomorrow.
Finally, President Biden offers his first State of the Union address this evening at 9PM. Pundits expect him to offer clarity on both his desired infrastructure plans along with the tax increases that he might propose to pay for them. Markets had a hiccup recently when reports came out about corporate tax increases, though they recovered quickly afterwards. It is still unclear what the market has already discounted regarding potential programs that could benefit the economy and taxes that could impede its progress. Investors seek clarity, but it remains to be seen whether we get clarity, confusion or surprises.
Markets are definitely pricing in some incremental volatility for the rest of the week. At-money options on SPY that expire this Friday, April 30th have an implied volatility of about 14%. That translates into daily moves of about 7/8 % for the rest of the week. Looking at the chart above, that seems low compared with previous FOMC weeks. And remember, most of those FOMC meetings did not coincide with earnings season and a State of the Union speech. I’ll leave it for readers to draw their own conclusions about whether risk aversion is properly priced into the markets.
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