History is on the side of stock and bond bulls as Federal Reserve officials kick off a two-day policy meeting.
Equities and bonds have posted weekly gains amid six of the eight Fed meetings over the past year, according to an analysis by Citigroup Inc.
It’s a trend that already appears to be playing out this week, with long-dated Treasuries and the S&P 500 Index both closing higher on Monday. In fact, the US bond market is on track for a third monthly gain, the longest run in three years, amid expectations Fed Chair Jerome Powell & Co. will signal the start of an easing cycle is near.
“We think a rally in Treasuries at least into Wednesday FOMC day close is likely,” Citi strategists Jabaz Mathai and Alejandra Vazquez wrote in a note. “Financial conditions in the US have eased on FOMC week as Powell has generally delivered a more dovish tone than expected.”
Regardless, the track record is encouraging for bulls. On average, the yield on 10-year Treasuries fell about 12 basis points, while the S&P 500 index gained 1.5% in weeks aligning with the Fed’s past eight meetings, according to Citi and data compiled by Bloomberg.
The tendency for stocks and bonds to rally around the Fed meetings — a phenomenon known as the “pre-FOMC drift” — has long been puzzling investors. The pattern has remained mostly intact since Powell in early 2022 launched the most aggressive monetary tightening in decades.
While the Fed is expected to keep benchmark interest rates at the highest level in more than two decades this week, traders will be closely watching for any hints that the start of easing is near. Swap traders have fully priced in a quarter-point rate reduction in September and a total of about 64 basis points of reductions by year-end.
While the Citi strategists pointed out that stocks often kept their gains following the rallies, they said it would be “prudent” to exit bullish positions in bonds before Friday’s US job report — which tends to trigger large market moves.
“FOMC meeting days have consistently resulted in lower yields and a steeper yield curve, with equities following suit and moving higher on the next day,” the strategists said. Looking beyond Wednesday, “the bond market will need weaker-than-expected data to sustain further rallies.”
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