We have noted often on this site and in our monthly strategy reports, that in recent years, Federal Reserve policy has become the main determinant of stock market performance. When the Fed opens the monetary spigot (or hints at it) stock prices rise and when they shut off the valve, prices fall. In a recent blog post, the Federal Reserve Bank of New York attributed over 80% of the return on stocks over the past two decades to, well, itself.
The article titled The Puzzling Pre-FOMC Announcement “Drift”, sites a Fed report that finds “that since 1994, more than 80 percent of the equity premium on U.S. stocks [stock return minus T-bill return] has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)…”
The drift is responsible for much of the market returns since 1994 when the FOMC began announcing its schedule. The chart below shows the difference in returns on days surrounding FOMC meetings, and those on other days.
No other major data release seems to produce similar market moving returns.
[W]e don’t find analogous drifts ahead of other macroeconomic news releases, such as the employment report, GDP and initial claims, among many others. The effect is therefore restricted to FOMC, rather than other macroeconomic, announcements.
The fact that Fed researchers find the results of their study puzzling is somewhat frightening. Has the Fed just now come to the realization that after years of repeatedly bailing out the stock market with easy money, investors have learned to game the system? An interventionist Fed has manipulated stock prices for years encouraging mispricing and the misallocation of capital. We are all worse off for it.
Jeremy Jones, CFA
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