The Amazing Power of Fed Announcements to Buoy the Stock Market

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Riskier investments generally have higher returns. That’s why, over the long term, stocks have higher returns than government bonds. But how much higher should those returns be? There’s a problem here. No matter how you figure it, historical returns on stocks seem to be a lot higher than they should be. This is called the “equity premium puzzle.”

Today, a pair of economists at the New York Fed, David Lucca and Emanuel Moench, introduce a new study of theirs this way:

In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further.

Great! Let’s make everything even weirder! But by God, that’s exactly what they do. They examined stock market returns over the past two decades and discovered that virtually all of the excess return occurs in a series of 24-hour periods eight times a year. Take away those 24-hour periods, and stock market returns are about what you’d expect them to be.

So what are these 24-hour periods? They’re the periods from noon the day before Federal Reserve announcements until 2:15 on the day of the announcement. During those periods, stocks rise an average of about 50 basis points. That’s the red line in the chart on the right. During every other three-day period, stocks do nothing on average. That’s the black line at the bottom of the chart.

What does this mean in aggregate? Since 1994, the S&P 500 has risen from about 400 to 1300. If you remove the three-day periods surrounding FOMC announcements, it’s barely risen at all.

Does this mean that FOMC announcements are being leaked? Probably not. If that were the case, stocks would go both up and down, depending on the news, and then they’d regain their old level after the leak-receivers had taken their profits. But that’s not what happens. Stocks go up, and only up, and then they stay up. What’s more, the authors report that this effect occurs only for stocks, not for any other kinds of assets.

So this is just plain weird, and the authors have no explanation. For some reason, the mere expectation of Fed news drives traders into a bullish frenzy.

But not for long. If this effect is for real, I assume it will be arbitraged away instantly by people with much faster computers than you and me. There’s no easy money to be made here for us retail schmoes.

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is the first thing despots go after. An unwavering commitment to it is probably what draws you to Mother Jones' journalism. And as we're seeing in the US and the world around, authoritarians seek to poison the discourse and the way we relate to each other because they can't stand people coming together around a shared sense of the truth—it's a huge threat to them.

Which is also a pretty great way to describe Mother Jones' mission: People coming together around the truth to hold power accountable.

And right now, we need to raise about $400,000 from our online readers over the next two months to hit our annual goal and make good on that mission. Read more about the information war we find ourselves in and how people-powered, independent reporting can and must rise to the challenge—and please support our team's truth-telling journalism with a donation if you can right now.

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