I was alerted to this little piece of mind-numbing news by the blog ZeroHedge (www.zerohedge.com), and, not believing it, went to the website for the Federal Reserve Bank of New York www.newyorkfed.org/research/ for confirmation. On the NY Feds page, there is a study by David Lucca and Emanuel Moench titled The Puzzling Pre-FOMC Announcement “Drift.”
The “drift” refers to the phenomenon of positive moves in the S&P 500 in the 24 hours preceding Federal Open Market Committee announcements. The dates covered in the study ranged from 1994 through 2010. From Lucca and Moench:
- Since 1994, there has been a large and statistically significant excess return on equities on days of scheduled FOMC announcement.
- This return is ahead of the announcement so it is not related to the immediate realization of monetary policy actions.
- …the return on the twenty-four-hour period ahead of the FOMC announcement cumulated to about 3.9 percent per year, compared with only about 90 basis points on all other days. In other words, more than 80 percent of the annual equity premium has been earned over the twenty-four hours preceding scheduled FOMC announcements, which occur only eight times per year.
- The chart below visualizes this return decomposition. It shows the S&P 500 index level along with an S&P 500 index that one would have obtained when excluding from the sample returns on all 2 p.m.-to-2 p.m. windows ahead of scheduled FOMC announcements. 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 implication of the graph, if we can infer causality from an unusually long string of coincidence, is that the S&P 500, without “drift” would be trading at 600 – less than ½ of its 2010 closing value.
The authors conclude with the following:
“Our findings suggest that the pre-FOMC announcement drift may be key to understanding the equity premium puzzle since 1994. However, at this point, the drift remains a puzzle.”
For simple people like me, it’s not all that puzzling.
It’s the liquidity bubble, stupid.