Friday, July 13, 2012

does the Fed drive the stock market?

In one of the most startling studies I've ever seen, researchers from the Federal Reserve this week measured how much the stock market is influenced by...the Federal Reserve. Their conclusion: "Since 1994, [stock] returns are essentially flat if the three-day windows around scheduled FOMC announcement days are excluded."

The Federal Reserve announces what it's going to do to interest rates eight times a year at Federal Open Market Committee meetings. These are scheduled in advanced and well-publicized, so investors know exactly when the goods are coming.

Since 1994 (when the Fed started publicizing its moves), the S&P 500 has risen from 450 to 1300. But remove the 24 hours just prior to FOMC announcements, and returns fall to almost nothing:

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