The Fed’s Persistent Impact on Equity Markets
Traditionally, Fed watching was for fixed-income players, but times have changed since the financial crisis. The titanic sums the central bank has injected into the stock market have forced equity analysts to pay attention to the Fed–and its communications–more than ever before.
Prattle deciphers this dynamic, shedding light on equity market fluctuations.
Illustrated in the graph above, Prattle ran trading simulations with a 100% equity portfolio, standard sector weightings and no leverage, using only the Fed Index as a buy/sell signal from 2004 through 2014. Generating 121% alpha, the Fed Index portfolio (represented by the orange line) navigated the perils of the financial crisis and yielded over a 200% return.
How? The Fed Index correlates in excess of 70% with major market indexes, making the signal excellent for financial forecasting. For equity investors looking for the next generation of trading signals, the Fed Index represents cutting-edge market insight.
Are macro signals viable for trade at the security and sector level? Quantitative trader Alex Von York uses Prattle’s central bank sentiment data to explore that very question. Download the Alex Von York white paper below.
