Inventory buyers beloved Alan Greenspan as a result of the insurance policies he pursued throughout his tenure as chair of the US Federal Reserve benefited the fairness markets. Not less than that was the traditional knowledge.
However did the markets mirror this narrative on days when Greenspan testified earlier than Congress? Did they have an inclination to go up as we’d count on, or did their efficiency contradict the narrative? And the way did the markets reply when Jerome Powell and different Fed chairs testified? What does their habits reveal about how they assessed every Fed chair?
To reply these questions, we pulled S&P 500 and MSCI market and asset class knowledge for all dates on which the final 5 Fed chairs testified earlier than Congress and in contrast the outcomes with each day by day common returns and common return volatility.
To higher isolate market sentiment round every Fed chair, we didn’t embrace Fed price announcement days in our evaluation. The Fed had already communicated its price selections to the general public prior to every Fed chair’s congressional look, and the market had presumably taken the choice — to hike, maintain, or cut back charges — under consideration.
So, how did the markets reply to the testimony of every Fed chair? Have been there any standouts or surprises?
Because it seems, Janet Yellen generated probably the most optimistic returns on the times when she testified relative to the 4 different Fed chiefs. On common, the S&P 500 rose 0.20% when Yellen spoke and solely 0.08% when Greenspan testified.
On the opposite finish of the spectrum, days when Ben Bernanke or Powell testified are related to extra detrimental inventory market efficiency. The S&P 500 returned –0.05% on common on days when Powell or Bernanke appeared earlier than Congress. After all, Bernanke helmed the Fed throughout the international monetary disaster (GFC) and Powell throughout a interval of resurgent inflation. So, the bearishness they evoked is probably not particularly stunning.
Fed Chair Congressional Testimony Common Returns: One-Day Window (%)
We see related outcomes play out throughout small-cap and worldwide equities in addition to worth and progress, with Yellen testimony days yielding higher returns than Greenspan’s. We repeated our exams over a three-day window across the Fed chairs’ congressional testimony and once more generated qualitatively related outcomes.
Bonds informed a distinctly completely different story, nonetheless. Whereas equities outperformed when Yellen testified, mounted earnings went in the wrong way, with the overall bond index returning –0.05% on days when Yellen appeared earlier than Congress.
Volatility was one other datapoint we explored, with Bernanke testimony days displaying probably the most volatility general.
Customary Deviation of Returns round Fed Chair Testimony Days
Of all of the Fed chairs, Yellen generated probably the most optimistic inventory market reactions and the least volatility over the previous 50 years, at the same time as bond buyers tended to reply negatively to her testimony.
In any other case, each Powell’s and Paul Volcker’s tenures featured a lot of rate of interest hikes in response to rising inflation. The weaker efficiency of equities on their testimony days might mirror how the markets got here to affiliate them each with larger charges.
If you happen to preferred this submit, don’t overlook to subscribe to the Enterprising Investor.
All posts are the opinion of the writer(s). As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the writer’s employer.
Picture courtesy of the US Federal Reserve
Skilled Studying for CFA Institute Members
CFA Institute members are empowered to self-determine and self-report skilled studying (PL) credit earned, together with content material on Enterprising Investor. Members can document credit simply utilizing their on-line PL tracker.
