Market Savior? Stocks Might Be 50% Lower Without Fed
Published: Thursday, 12 Jul 2012 | 3:15 PM ET Text Size
By: John Melloy
A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank.
Theoretically, the S&P 500 [.SPX 1352.95 18.19 (+1.36%) ] would be more than 50 percent lower—at the 600 level—if the bullish price action preceding Fed announcements was excluded, the study showed.
Posted on the New York Fed’s web site Wednesday, the study sought out to explain why equities receive such a high premium over less risky assets such as bonds.
What they found was that the Federal Reserve has had an outsized impact on equities relative to other asset classes.
For example, the market has a tendency to rise in the 24-hour period before the release of the Fed’s statement on interest rates and the economy, presumably on expectations Chairman Ben Bernanke and his predecessor, Alan Greenspan, would discuss or implement a stimulus measure to lift asset prices.
The FOMC has released eight announcements a year at 2:15 ET since 1994. The study took the gains in the S&P 500 from 2 pm the day before the announcement to 2 pm the day of the statement and subtracted that market move from the S&P 500’s total return over that time span.
Without the gains in anticipation of a positive Fed action, the S&P 500 would stand at just 600 today, rather than above 1300.