Bernanke Closes the Gap

The stock market noise event that began with an unfortunately statement made by Federal Reserve Chairman Ben Bernanke back on Wednesday, 19 June 2013 at 2:42 PM Eastern Daylight Time is essentially over.

We've chronicled the event from the beginning, as the S&P 500 first first lost some 4.8% of its closing value on 18 June 2013 in just four trading days, before taking another eleven trading days to recover to just over that level, to finally get to the effective conclusion of the noise event another seven trading days later!

What marked the end of the event was the conclusion of Chairman Bernanke's previously scheduled two days of testimony before the U.S. Congress, in which the Chairman was very careful to keep on the Fed's damage control message that the beginning of the end of its latest programs of quantitative easing was not imminent, and would be very unlikely before the end of 2013. Investors reacted by more completely shifting their forward-looking focus to the first quarter of 2014 in setting stock prices, which we can observe in our chart below:

In our chart, we see that the change in the growth rate of daily stock prices (indicated by the dotted blue line) rapidly closed the gap with the level indicated by the year-over-year change in the expected growth rate of trailing year dividends per share for the first quarter of 2014 (indicated by the solid green line). With that level representing where investors are now focused, it is now well within the typical range of variation that we observe when the stock market is characterized by relatively low levels of noise.

What this means is that the Fed has been successful in re-shifting the forward-looking focus of investors back to the level of expectations associated with the future quarter of 2014-Q1.

In the absence of a new noise event, we would anticipate that the acceleration for stock prices will converge with and bounce around this level. The good news is that will mean generally rising stock prices.

The bad news is that noise is always present in the stock market - only its source and volume ever changes!

On a closing note, we'll observe that if nothing else, Ben Bernanke's second term in charge of the Fed is ending as it began, with a noise event that only arose as a direct result of his status as the Chairman of the Federal Reserve. Let's face it - he certainly wouldn't have anywhere near the same impact on markets if he were just a tenured professor at the second best university in New Jersey.

There's some symmetry there to appreciate, but if we're being honest, we're hoping that the next Fed Chair won't be so damned noisy in their comings and goings.

Previously on Political Calculations

If you're just discovering our brand of analysis now, here's a good part of the electronic trail for how we got to this point! First up, the basic theory we've developed and where we get our data:

• How Stock Prices Work - The basic theory for why "Which Future?" is the most important question for investors to answer.


• The Math Behind How Stock Prices Work - Just as advertised. Welcome to chaos!


• Whither Dividend Futures - we tell you exactly where we get our data. Between this and our math (linked above), you can do this kind of cutting edge analysis too....

Next, that electronic trail of analysis we've provided throughout the event:

• The World Investors and the Fed Live In Now - Our snapshot of the market right before the event, in which we note that investor concern about the future of QE was growing and remark that there will be a market reaction in response to the outcome of the Fed's two-day meeting later that week.


• The Bernanke Noise Event - as the Summer of 2013 shall ever be known to investors....


• Now Is It Time to Sell? - according to statistics, a quaint branch of mathematics that only works to describe how stock prices vary with respect to their trend when order is present in the market. The problem with it is that the market goes in and out of order, so it's periodically pretty useless....


• The Fed's Real QE Mistake: Timing - We explain how Bernanke really screwed up.


• Now What Will You Do? - the statistical line is crossed! We look at everything that we see screaming "sell", without actually saying it's time to sell.


• The Fed Attempts to Walk It Back - we anticipate how the Fed will respond to Bernanke's error, and we determine if it will work.


• The GDP Multiplier for QE - Not about investing, at all! Instead, we explain why sustaining QE at current levels is so important to the U.S. economy at present.


• "Never Bet Against the Fed" - we visually illustrate that the Fed's response to repairing the damage from Chairman Bernanke's blunder is working and recap why fears of stock market doom, despite signals to the contrary, were really overblown.


• Bernanke Closes the Gap - the article you're reading right now, as it appears on our own site, just as we intended it!

We tossed the last link in because we're well aware that the vast majority of our readers encounter our articles elsewhere on the web! Come and visit us, if for no other reason than it's the one place on the web where our work appears, and in the case of the tools we develop, works, just about exactly as we intended!