Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
A reader forwarded me a remarkable piece that originated from the NY Fed. Based on a study they did a vast majority of stock market return since 1994 has happened in the 3 day window around the 8 annual FOMC announcement days, with a heavy tilt to the day BEFORE the FOMC announcement. While it is common knowledge that a lot of people try to front run the Fed, the magnitude of this effect on the market in black and white is shocking. Essentially to capture almost all return of the market since 1994, one need only be in the market 24 days a year.
Per WSJ Markebeat Blog:
For many years, economists have struggled to explain the “equity premium puzzle” — the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.”
We 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 charts below shows how the S&P 500 performs on the days before and after Fed announcements. Stocks tend to rise more on the day before and morning of the released statement, whereas gains level off following the announcement for the remainder of the session and the following day.
“In a nutshell, the figure shows that in the sample period the bulk of the rise in U.S. stock prices has been earned in the twenty-four hours preceding scheduled U.S. monetary policy announcements,” the economists say.
The full report can be found here.
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