How Fed announcements help your stock portfolio

July 11, 2012

One of the big questions financial economists try to answer is why stocks generally have higher returns than you’d expect based on their risk level. Now, a couple of researchers at the New York Federal Reserve have identified a potential cause: Ben Bernanke.

Well, not Bernanke personally so much as the Federal Reserve’s Open Market Committee. David Lucca and Emanuel Moench have found (hat-tip to Binyamin Appelbaum and Newsweek’s Matt Zeitlin) that fully 80 percent of the equity premium — that is, this unexpected bump in stocks’ returns — since 1994 has come right before Fed announcements. And, because the change comes before the announcements, it can’t be attributed to the policy effects of the announcement:



As the chart shows, stocks have very little gain on days without FOMC announcements, and then major gains on the eight days every year when the Fed updates its policies. Even more striking is what the S&P would look like without these Fed-related bumps:



The whole paper is worth a read. Intriguingly, the authors find similar effects in other stock exchanges, meaning stocks from London to Toronto to Berlin go up when the FOMC is about to speak. We still don’t know why FOMC announcements have these effects, but if you’re getting a little extra change from keeping your savings in stocks rather than bonds, it appears you have the Fed to thank.

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Brad Plumer | July 11, 2012