Indexology^® Blog

The Federal Open Market Committee — the Fed’s policy making unit — meets today and tomorrow.  Recent reports show the economy expanding, but not accelerating. Housing starts and consumer prices both slightly weaker than expected in today’s reports.  Given this and recent misplaced fears that the Fed was about to end QE3, most analysts look for little change in Fed policy combined with some comments meant to end worries about a quick end to current policy.

Separately, President Obama made remarks in an interview reported by Bloomberg and by the Wall Street Journal suggesting that Fed Chairman Bernanke will step down at the end of his current term in January 2014.  Almost every economist who has served in the Obama administration or worked at the Fed in the last few years is being mentioned as a replacement — in other words, no one knows who might be chosen. However, given the current soft economic recovery and Bernanke’s success at the Fed, a new Fed chairperson is not likely to make a dramatic shift in policy.

Index funds could experience slightly more trading than usual on Friday.  Company’s shares outstanding change from time to time due to buy-backs, issuance for employee options or other events. The percentage of shares in float — not closely held — also change from time to time.  In theory S&P Dow Jones could update data on the number of shares outstanding for companies in its indices daily; but most of these changes are small and dealing with numerous tiny changes would be costly for index fund managers.  As a result, changes of less than 5% of the number of shares outstanding are done once a quarter on the third Friday of the last month of the quarter — next Friday, June 21st.  This is the same day that futures and options contracts expire, so there is plenty of liquidity in the market.  These are all small adjustments since large share changes related to mergers are done when the merger closes.  Aside from slightly more trading than typical for Friday in summer, there isn’t likely to be any impact. The indices affected include the S&P 500, S&P MidCap 400 and the S&P Small Cap 600, among others. The Dow Jones Industrial Average is price-weighted: stock prices, but not share outstanding, matter for the calculation so there is no rebalance for the Dow.

Just an aggravating stat for all those who keep talking about the enormous volatility. The historical average intraday high price over the intraday low price is a swing of 1.482%, with a 1% variance (high / low) occurring 71.3% of the time over the past 50 years. The 2013 year-to-date average is a 0.916% variance, and has occurred 34.5% of the time. 2008 had a 90.1% rate, an average daily high / low of 2.809%, with 27 times, over 10% of the trading days, when the market opened up or down over 1% and closed more than 1% in the other direction (14 opening higher than 1% and closing over 1% down, and 13 opening off 1% and closing up at least 1%), and that was just on the open and close. 2008 had 6 days of at least a 10% spread between the high and the low – think of the S&P moving 160 points or the Dow 1,500 points intraday. More volatility then we we’ve had recently, yes, as long as recently is very short term.

The IMF released its latest forecast of US economic growth and US economic policy this afternoon, sending the S&P 500 and the Dow into negative territory.  While the market response is likely to be forgotten by next Monday, the IMF’s comments are worth consideration.  The forecast sees 1.9% real GDP growth in 2013,  2.7% in 2014 and 3.5% in 2015 — the 2013 number is a bit lower than others while the 2014 and 2015 figures look strong. Inflation is expected to remain low and unemployment will drift down a bit, averaging 7.5% this year and 7.2% next year.

The IMF applauds Fed policy, commenting “the Fed appropriately continued to add monetary policy accommodation over the past year…” but does not offer any comments on what the central bank might do next.  On fiscal policy (taxes and spending) the comments are more pointed and less complimentary: “On the fiscal front deficit reduction in 2013 has been excessively rapid and ill-designed.”  The IMF calls for repealing the sequester and replacing it with a more balance and back-loaded program of fiscal policy and for a early increased in the debt ceiling.

While the number one short term concern for the market is what the Fed does next, the IMF’s comments about the debt ceiling and fiscal policy point to the key issues for how the market behaves in the second half of 2013.