Chart Of The Year: The Fed Has Doubled The S&P Admits... The Fed

Tyler Durden's picture


Prepare to have your minds blown courtesy of what is easily the most astounding chart we have seen in a long, long time, prepared by the economists at the, drumroll, New York Fed, which finds that absent what the Fed calls "Pre-FOMC Announcement Drift", or the move in the S&P in the 24 hours preceding FOMC announcements, the S&P 500 would be at or below 600 points, compared to its current level over 1300. The reason for the divergence: the combined impact of cumulative returns of in the S&P on days before, of, and after FOMC announcements. But, but, fundamental, technical, coffee grinds, Finance 101, Oprah Winfrey, Jim Cramer and Econ 101 analysis (in declining order of relevance and increasing order of voodoo) all tell us this is im-po-ssible? Because if the Fed is right about the Fed induced drift, it is all about, you guessed it, easy money. 

Here it is, black pixels on white LCD, straight from Simon "Harry" Potter henchmen's mouth:

We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.”

We are fairly certain one can come up with many other names for this "phenomenon." It goes on:

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.

Not a puzzle. Just go into sub-basement C and keep staring at the Heidelberg Mainstream 80, Web-fed Rotary Printer until the puzzle solves itself.

Full paper:

The Puzzling Pre-FOMC Announcement “Drift”

David Lucca and Emanuel Moench

For many years, economists have struggled to explain the “equity premium puzzle”—the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.”

    The equity premium is usually measured as the difference between the average return on the stock market and the yield on short-term government bonds. Previous research on the size of the premium finds that it is too large for plausible levels of risk aversion (see Mehra [2008] for a review).

The Drift: A First Take

The pre-FOMC announcement drift is best summarized in the chart below, which provides two main takeaways:

  1. Since 1994, there has been a large and statistically significant excess return on equities on days of scheduled FOMC announcements.
  2. This return is earned ahead of the announcement, so it is not related to the immediate realization of monetary policy actions.


    The chart shows average cumulative returns on the S&P 500 stock market index over different three-day windows. The solid black line displays the average cumulative return starting at the market’s opening on the day before each scheduled FOMC announcement to the market’s close on the day after each announcement. Our sample period starts in 1994, when the Federal Reserve began announcing its target for the federal funds rate regularly at around 2:15 p.m., and ends in 2011. (For a list of announcement dates, see the FOMC calendars.) The shaded blue area displays the 95 percent confidence intervals around the average cumulative returns—a measure of statistical uncertainty around the average return. We see from the chart that equity valuations tend to rise in the afternoon of the day before FOMC announcements and rise even more sharply on the morning of FOMC announcement days. The vertical red line indicates 2:15 p.m. Eastern time (ET), which is when the FOMC statement is typically released. Following the announcement, equity prices may fluctuate widely, but on balance, they end the day at about their 2 p.m. level, 50 basis points higher than when the market opened on the day before the FOMC announcement.

    How do these returns compare with returns on all other days over the sample period? The dashed black line, which represents the average cumulative return over all other three-day windows, shows that returns hover around zero. This implies that since 1994, returns are essentially flat if the three-day windows around scheduled FOMC announcement days are excluded.

A Deeper Look through Regression Analysis

The previous chart showed stock returns without accounting for dividends or the return on riskless alternative investments. In the table below, we account for these factors in a regression analysis by considering the return, including dividends (in percent), on the S&P 500 index in excess of the daily yield on a one-month Treasury bill rate, which is a measure of a risk-free rate. We regress this “excess return” on a constant and on a “dummy” variable, equal to 1 on days of FOMC announcements.


    The coefficient on the constant (second row) measures the average return on non-FOMC days, while the coefficient on the FOMC dummy (top row) is the differential mean return on FOMC days. In the first column, we regress close-to-close stock returns and see that excess returns on FOMC days average about 33 basis points, compared with an average excess return of about 1 basis point on all other days. As seen in the previous chart, this return is essentially earned ahead of the announcement—hence our label of a pre-FOMC announcement drift. Indeed, in the third column we see a return of about 49 basis points during a

2 p.m.-to-2 p.m. window, while the FOMC releases its statement at 2:15 p.m. ET. In the second column, we repeat the regression using the close-to-close returns from 1970 to 1993, which is prior to when the Fed released its policy decisions right after each meeting, and see that essentially no such premium exists. The bottom rows of the table decompose the annual excess return of the S&P 500 index over Treasury bills on the return earned on FOMC days and the return earned on all other days. As shown in the third column, 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.


An International Perspective
Does this striking result apply only to U.S. stocks? While we do not find similar responses of major international stock indexes ahead of their respective central bank monetary policy announcements, we observe that several indexes do display a pre-FOMC announcement drift, as the chart below shows. Cumulative returns rise for the British FTSE 100, German DAX, French CAC 40, Swiss SMI, Spanish IBEX, and Canadian TSE index when each exchange is open for trading over windows of time around each FOMC announcement in our sample.


Potential Explanations

One might expect similar patterns to be evident also in other major asset classes, such as short-and long-term fixed-income instruments and exchange rates. Surprisingly, though, we don’t find any differential returns for these assets on FOMC days compared with other days. In other words, the pre-FOMC drift is restricted to equities. Further, we don’t find analogous drifts ahead of other macroeconomic news releases, such as the employment report, GDP and initial claims, among many others. The effect is therefore restricted to FOMC, rather than other macroeconomic, announcements. In the Staff Report, we attempt to account for standard measures considered in the economic literature that proxy for different sources of risk, such as volatility and liquidity, but they also fail to explain the return. Finally, we consider alternative theories that feature political risk, investors with capacity constraints in processing information, as well as models where stock market participation varies over time. Although these theories can help qualitatively explain the existence of a price drift ahead of FOMC announcements, they are counterfactual in some dimension of the empirical evidence.

    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.

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Wed, 07/11/2012 - 09:01 | 2605510 Crispy
Crispy's picture


Nice confimation of rigged mkts...

Lets see the same overlay with gold.

Wed, 07/11/2012 - 09:06 | 2605531 Leopold B. Scotch
Leopold B. Scotch's picture


Wed, 07/11/2012 - 09:08 | 2605541 SheepRevolution
SheepRevolution's picture

"They’ll get it . . . they’ll get it all from you sooner or later cause they own this fuckin' place. It’s a big club and YOU AIN'T IN IT! You and I are not in The big club. By the way, it’s the same big club they use to beat you over the head with all day long when they tell you what to believe. All day long beating you over the head with their media telling you what to believe, what to think and what to buy. The table has tilted folks. The game is rigged and nobody seems to notice. Nobody seems to care."


George Carlin, 1937-2008.

Wed, 07/11/2012 - 09:38 | 2605657 tmosley
tmosley's picture

Is it just me, or does it seem like everything is coming to a head this morning?

Wed, 07/11/2012 - 10:10 | 2605789 Jay Gould Esq.
Jay Gould Esq.'s picture

Lest we forget, that Heidelberg Mainstream 80 is going to require several tons of Crane high-durability cotton/pulp substrate banknote paper for the likely prodidigious quantities of future intaglio printing to ensue, for S&P "price targets" must be met.

Wed, 07/11/2012 - 10:22 | 2605844 FEDbuster
FEDbuster's picture

Ah the good ole days, when the Bureau of Printing and Engraving actually needed paper and ink......

Now all the FED needs is a titanium keyboard and some extra zero keys.

Wed, 07/11/2012 - 10:40 | 2605943 Pinto Currency
Pinto Currency's picture


The equity markets run like crazy during inflationary periods such as experienced in Weimar Germany and Zimbabwe.

Watch the markets take-off after an initial dip as the realization of increasing currency debasement grows.

Wed, 07/11/2012 - 10:56 | 2606031 FEDbuster
FEDbuster's picture

I have read that Zimbabwe Stock Market had some 200%+ up days.  I am still a Zimbabwe multi-trillionaire from the good ole days.

Wed, 07/11/2012 - 11:51 | 2606251 BigJim
BigJim's picture

Potential Explanations

blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah. blah blah blah fucking blah.

How about - we (the 'Fed') pre-release the FOMC minutes to our owners, the TBTF banks? You know, the ones with 101% profitable trading days?

Thu, 07/12/2012 - 03:25 | 2609100 Muppet of the U...
Muppet of the Universe's picture

Senor Jim, the case you are envisioning: someone is told to buy the market before the FOMC meeting.  Someone who suckles at the Fed's teet.

Second, the bank or hedge fund keeps doing it.  Larger at first, then slower after a while.  This may have been how this, cancerous market tumor (one of many), started.

Eventually driven and motivated traders, who are constantly looking for an edge, will notice.  I promise you that, whoever wrote this piece, has known, or knows someone who has known, about this phenomenon for a LOOONG time.  As the Fed's role as central planner grows, more people take notice.  So, do you really have a choice?  Are you selling or buying into the fedday announcement? 

Now let me ask you a fun one.  What does the Fed have to gain from this??  perhaps artificially holding up the market...

But this is where this article becomes the con job...  They really don't show you what happens after Fed Day, 1-3 days after, & in absence of outliers like QE.


The bulk of that price movement?  Isn't wild fed printing like the Durden wants you to believe.  Get that childish notion out of your head.  It's traders, hedge funds, bankers - anticipating the climb.  & I bet you, if you do research, you'll find more information than what is shown here, which is solely "24" hours before...  jeeze what a round number.



Personally I think that it is the attempt to get a good seat on the QE bus.  But also, it is undoubtedly, an attempt to btfd...  Now if you bought before everyone else going into Fed Day, and they came out with QE?  Who is sitting large?  (What does that spell?  P&D)  You see, so many of you forget, this wasn't ever really a... system for financing industry.  It was a system for tanking corporations into behemoths.  & along the way, it became a casino.  A racket.  Truly, it is nothing more than a game.  Take my word for it- I was a professional gamer.

Thu, 07/12/2012 - 02:58 | 2609101 Muppet of the U...
Muppet of the Universe's picture

edit: delete

Wed, 07/11/2012 - 10:39 | 2605939 orangedrinkandchips
orangedrinkandchips's picture

One would wish but as long as the NYFD has THE BIGGEST BOTS ON THE BLOCK.....we will drift endlessly with no solution.


I can feel the ice chunk breaking up.... slowly but shirley.....just sit back and watch

Wed, 07/11/2012 - 09:41 | 2605667 StormShadow
StormShadow's picture

RIP, George. You were so ahead of your time. Didn't fully appreciate you in life as I was on blue pills then. With your passing I began taking red pills and now realize just how funny, and dead on serious, you were.

Wed, 07/11/2012 - 09:52 | 2605723 laomei
laomei's picture

Guy has always spoken the truth, and the really really really sad thing is that most of the audience just saw him as some sort of stand up comic.  I mean, really, how sad is that? He wasn't making jokes, he was speaking the dead honest truth and the reaction? Laughter.

Wed, 07/11/2012 - 10:16 | 2605810 Oh regional Indian
Oh regional Indian's picture

No surprise there Laomei. It's an old trick. Mkae people laugh about the serious business, and then they can never ever take it seriously.

Case in point? Jon Stewart and the Daily Show.


Wed, 07/11/2012 - 10:17 | 2605821 laomei
laomei's picture

Stewart's a shill and has lines he'll never cross... because he's a shill.

Wed, 07/11/2012 - 10:43 | 2605898 blabam
blabam's picture

Let's not forget Bill Hicks.

Wed, 07/11/2012 - 11:00 | 2606052 DaveyJones
DaveyJones's picture

the guy that follows him (Colbert) pushes a little farther but is still under clear corporate control and still playing the political party games.  

Wed, 07/11/2012 - 10:57 | 2606028 DaveyJones
DaveyJones's picture

comedy is tragedy with a change of wardrobe

Carlin was a master of philosophy and language

Wed, 07/11/2012 - 11:08 | 2606085 Cathartes Aura
Cathartes Aura's picture

ahh, so true DaveyJones - in both philosophy and the words used to describe the awareness that arises from seeing the world through an unique perspective, we have our "seers" and wise folk.

language can be used to obfuscate - but also simply describe the absence of emperor attire.

Wed, 07/11/2012 - 10:56 | 2606027 Cathartes Aura
Cathartes Aura's picture

while Carlin may have been "serious" in his perspective, and message - stand up social commentary pokes fun at the absurdity of culture taking itself  "seriously" - when we see the absolute bullshit - as Carlin would say - of culture as it's presented to us, in all it's spangles, pom poms and glitter, jumping and waving for your undivided attentions. . .

then we're freed from ever taking it seriously again. . . voila! hilarious!

Wed, 07/11/2012 - 09:15 | 2605566 Big Slick
Big Slick's picture

While not exactly what you request wrt gold, Martenson had a great piece in March about the seemingly rigged gold market:

"...results of a simple 'buy and hold' investment in gold over the past ten years vs. a more active (and clever) strategy that both shorts gold during the daily hours and then buys gold long for the overnight session... "

"... if one simply bought gold and held it only during the open and close of the US daily fix, one would have lost 70% of one’s money during the same period of time [10 years] that gold rose in price by more than 500%

(I don't know how to post graphs so go to the story to see)

Talk about downward pressure by someone!

Wed, 07/11/2012 - 09:26 | 2605607 MillionDollarBonus_
MillionDollarBonus_'s picture

Don't you morons even know our Federal Reserve's dual mandate!? I must be dealing with a bunch of RETARDS. The Federals Reserve was comissioned by congress to pursue their dual mandate for MAXIMUM EMPLOYMENT AND PRICE STABILITY. Only a bunch of total MORONS wouldn't want high employment and stable prices.

Wed, 07/11/2012 - 09:41 | 2605671 sdmjake
sdmjake's picture

Boy they sure are doing a good job with that employment thing... U-6 is currently running 15% unemployment.
That price stability thing ain't so good either. Have you been living under a rock for the last decade? What dollar price stability are you seeing?
I think everyone here would like 'max employment & price stability'. But the Fed Reserve sure doesn't have the ability to provide it! Only morons think they do

Wed, 07/11/2012 - 09:50 | 2605719 MillionDollarBonus_
MillionDollarBonus_'s picture

Looks like you didn't even bother to check their official site

I QUOTE: "The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act."

Are you happy now? LOL. Don't libertarians ever get tired of getting completely owned?

Wed, 07/11/2012 - 09:56 | 2605740 LawsofPhysics
LawsofPhysics's picture

MDB is arguing in favor of ending the Fed, what is this world coming to? Now we all know something is definitely wrong.

Wed, 07/11/2012 - 10:06 | 2605773 derek_vineyard
derek_vineyard's picture

prices are within limits for last 4 years---good job, ben & co.

Wed, 07/11/2012 - 10:12 | 2605795 Stoploss
Stoploss's picture

All mandates have been broken.

All mandate breaking liars shall hang by the neck until dead, as per the United States Constitution.

Wed, 07/11/2012 - 11:03 | 2606065 punxsutawney phil
punxsutawney phil's picture

Wow dude, you read the FED site and believed it?  First of all..The Federal Reserve Act has been amended by some 200 subsequent laws of Congress.  The FOMC was not created till 1930, 17 years after the Act was created.  You shithead... the latest mandate was added during the 1970s, the Federal Reserve Act was amended to require the Board and the FOMC "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates" (Section 2A)


They make it up as they go along. 


Original title:  Full title An Act To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.

Wed, 07/11/2012 - 17:59 | 2607901 DaveyJones
DaveyJones's picture

...and even with that, they are not promoting their "policy goals" 

"The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Stable prices in the long run are a precondition for maximum sustainable output growth and employment as well as moderate long-term interest rates. When prices are stable and believed likely to remain so, the prices of goods, services, materials, and labor are undistorted by inf lation and serve as clearer signals and guides to the efficient allocation of resources and thus contribute to higher standards of living. Moreover, stable prices foster saving and capital formation, because when the risk of erosion of asset values resulting from inf lation—and the need to guard against such losses—are minimized, households are encouraged to save more and businesses are encouraged to invest more."


the only thing they are promoting (now) is their own ass saving interest and trying (ultimately unsuccesfully) to control the cost of borrowing while inflating to try to save the value of the asset holding 1% and lower the real price of debt payment   

Wed, 07/11/2012 - 11:38 | 2606202 shovelhead
shovelhead's picture

I agree MDB.

People are too dumb to realize what a good deal the Fed is with their dual mandate.

You get TWO hot steaming piles of dung for one low price.

Free market WIN.

Wed, 07/11/2012 - 11:45 | 2606232 AnAnonymous
AnAnonymous's picture

I QUOTE: "The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act."


Should make it a trial mandate.

Wed, 07/11/2012 - 10:08 | 2605770 SMG
SMG's picture

The real Federal Reserve mandate is to protect the Illuminati Oligarchy's banks, companies, and interests, and assist them in obtaining more and more control. 

Those other mandates are just a lie to keep the public pacified.

When there's blood in the street, make sure the pitchforks are pointed in the right direction. 

Wed, 07/11/2012 - 10:09 | 2605784 aldante
aldante's picture

I want to take your avatar from behind.

Wed, 07/11/2012 - 09:50 | 2605720 Top_Kill
Top_Kill's picture

You have to be kidding me. Are you just pushing peoples buttons for a rise. Where on that chart do you see STABILITY YOU FUCKING MORON? Please see the charts on all commodities and point to the stability.

Wed, 07/11/2012 - 10:02 | 2605761 MillionDollarBonus_
MillionDollarBonus_'s picture

Those prices would have been a lot LESS stable if our Federal Reserve bank had not pursued their dual mandate. Did you ever take that into account???

Thu, 07/12/2012 - 22:29 | 2611775 MeelionDollerBogus
MeelionDollerBogus's picture

The only dual mandate is

a) pocket money from the printing

b) send money to buddies to pocket from the printing

I don't like that mandate very much.

Wed, 07/11/2012 - 09:54 | 2605733 NeedleDickTheBu...
NeedleDickTheBugFucker's picture

If MDB did not exist, it would be necessary to invent him.

Wed, 07/11/2012 - 10:27 | 2605872 FEDbuster
FEDbuster's picture

The sad truth is he does exist in the form of Obama's Council of Economic Advisors.

Wed, 07/11/2012 - 10:17 | 2605817 slyhill
slyhill's picture

They certianly stabilized the price of money for the PD's.

Wed, 07/11/2012 - 11:11 | 2606106 PiratePawpaw
PiratePawpaw's picture

I have seen this before; It's that new "sarcasm" thing all the kids are into. But dont worry, it's just a fad. It will never catch on.


"However, at this point, the drift remains a puzzle".....Really?! Morons found...

Thu, 07/12/2012 - 22:50 | 2611798 MeelionDollerBogus
MeelionDollerBogus's picture

Pushing up prices for gas, food and rent by printing money actually reduces employment. People just turn to barter, stored goods and credit without working as well as welfare, foodstamps and such then leave the country if they figure out the problem before running out jof supplies

Wed, 07/11/2012 - 09:36 | 2605649 vast-dom
vast-dom's picture

beyond disgusting. who can i fucking sue? a class lawsuit from this info alone could get the ball rolling.

Wed, 07/11/2012 - 09:48 | 2605710 OmNamah
OmNamah's picture

Indian markets broke out of its long term downward are silver and gold showing sign of bottomming out...Treasuries are showing signs of topping.....can this be possible that we have new bull market beginning now and here....i don know how...i don know why....prices are telling....


c for yourself the charts

Wed, 07/11/2012 - 13:20 | 2606627 max2205
max2205's picture

Yakaey yack, don't talk back


Love and kisses,



Wed, 07/11/2012 - 13:27 | 2606674 Clayton Bigsby
Clayton Bigsby's picture

Well what the fuck am I getting this CFA for?  Front-run the Fed and get paid.  That shit is all me, son....

Wed, 07/11/2012 - 09:13 | 2605562 cahadjis
cahadjis's picture

or right even

Wed, 07/11/2012 - 09:21 | 2605586 Yes_Questions
Yes_Questions's picture




Wed, 07/11/2012 - 09:25 | 2605601 Dr. Richard Head
Dr. Richard Head's picture

Food stamps, disability payments, corporate subsidies, medical care are now rights, so not make wrongs a right too - for the corporate banking ologopoly that is.

Do NOT follow this link or you will be banned from the site!