U.S. equities’ nearly 17 percent gain year-to-date has occurred against a 12 percent decline in trading volumes compared with the first four months of last year and a 7 percent decline compared with all of 2018.[1] This underscores why many are referring to the current environment as a “low participation rally.” But given that 63 percent of S&P 500 firms will have reported first quarter earnings by May 3[2] and a Federal Reserve (Fed) meeting scheduled for May 1, trading volumes are likely to get a boost as the calendar flips from April to May.
A Powell-ful Punch Of Volatility
The Fed meeting may be the larger catalyst for action, even if they have adopted a patient stance. Fed Chair Jay Powell has proved to be a “volatile” chair so far, and trading volumes five days after policy decisions have been on average 7 percent higher than the preceding five days.[3] Under Powell the CBOE VIX Index (VIX)—otherwise known as Wall Street’s “fear gauge” as it represents the market's expectation of 30-day forward-looking volatility—is higher by an average of 4.3 percent[4] through the five days following a Fed meeting relative to the five days preceding a Powell-run policy confab.
While these increases may not be a shock, given that Fed meetings act as a macro touchpoint where market-moving news is revealed, comparing these numbers with those from the tenure of Powell’s predecessor suggests a more volatile current environment. The same analysis of comparing the average VIX Index level five days after a policy meeting to the five days prior reveals that under former Fed Chair Janet Yellen the VIX registered just a 0.8 percent increase—not the 4 percent figure associated with Powell. This isn’t the only data point that indicates a Powell Fed has led to more volatile price action in equities.
In the five days after a Fed policy meeting;[5]
• The average absolute change value, which reflects the range of price action, in the S&P 500 Index has been 2.6 percent for Powell, but was 1.1 percent for Yellen.
• The average net change, which accounts for both gains and losses, in the S&P 500 Index has been -1.2 percent for Powell, but was 0.1 percent for Yellen.
• The average change on negative return days only, which indicates the drawdowns witnessed historically, in the S&P 500 Index has been -3.4 percent for Powell, but was only -1.0 percent for Yellen.
Volatile Rhetoric
To be fair, the sample size under Janet Yellen covers more than 30 meetings, while Powell has had only nine. Small sample size aside, however, the Powell-led Fed hasn’t been a picture of stability since he assumed leadership in early 2018. At times, Powell has presented seemingly conflicting diagnoses from interview to interview. For instance, he claimed we were “far from neutral” [6] on interest rates in October of 2018 and “just below” [7] neutral a month later in November before putting rate hikes “on hold”[8] in December.
In a span of three months, the Fed policy viewpoint drastically changed. This level of policy uncertainty was exacerbated when Powell and the Fed became a new presidential lightning rod in the Twitter-sphere. One of the president’s tweets went so far to say, “The only problem our economy has is the Fed.”[9] Powell’s volatility profile, therefore, seems warranted—even if the title has been earned over a short time span.