Today the Senate Banking Committee pushed forward Janet Yellen’s quest to become the 15th head of the Federal Reserve, clearing the way for a full Senate vote next month. Wall Street legend tells us to brace for an equities downturn as Yellen settles into her presumptive new desk.
According to Sam Stovall, chief equity strategist at S&P Capital IQ, it has long been held that stocks perform badly in the early months of any Fed chief’s term. Causation is unclear, but like the popular slogan “sell in May and go away” the notion has likely informed at least a few investors’ trading choices.
Skeptical, Stovall put the myth to the test.
He found that three months into six of 14 Fed chief tenures the S&P 500 was trading up. The markets were closed due to World War I when inaugural chairman Charles S. Hamlin took the post, so the seven occasions when the S&P was down are hardly resounding evidence that investors should expect a sell off.
On a percentage basis the positive swings ranged from 2.4% under current chief Ben Bernanke to 19% under Eugene black. The downturns go from 2.1% under three different heads to 27.1%. On averafe the S&P fell 1.3% during these three month periods. This, however, does not tell the whole story.
That astounding 27.1% skid occurred between August 1987 when Alan Greenspan took the helm, and November of that year. In October the crash of 1987 sent stocks spiraling down 20% in a single day. It took a year and a half for the market to regain it’s pre-crash value, but by the time Greenspan left the Fed after 18 years in January 2006 the S&P was up 291.8%.
Excluding the Greenspan era the S&P would have risen 1% on average in the first three months — even with a 20.1% decline during Eugene Meyer’s early days in 1930. Greenspan’s 18.5 year term is a;sp proof that early performance doesn’t say much about the longer game.
Current Chairman Ben Bernanke saw a 2.4% increase in his first three months, a .3% decrease in his first six and ultimately 12.4% in growth in his first year. By year three of Bernanke’s eight the financial crisis was in full swing and the S&P fell 56.8% by its March 2009 low. With a few months to go before Bernanke steps down, the index is up around 40% from when he took office.
Looking ahead, Stovall notes the Standard & Poor’s Economics views presumptive-chair Yellen as a positive for stocks since she will policy continuity. “Despite the fragility of the economic recovery,” he writes, “S&P Economics doesn’t think she will allow inflation to rise substantially above 2.0%. They believe Ms. Yellen would advocate policy that bolsters the economic recovery, while keeping a close eye on both elements of the Fed’s mandate.”
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