Here’s a common misconception: the Federal Reserve chairman has “control” over the U.S. stock market.
In reality, the chairman’s impact on the stock market is minimal. The stock market follows the U.S. economy and corporate earnings over the long run. The Fed’s impact on the economy is much smaller than most investors believe. If the Fed could “control” the economy, the 2008 recession would never have happened in the first place!
Ultimately, the economy and stock market are going to go where they are going to go. The Fed can merely amplify the economy’s existing trend.
In the short term, the Fed chairman’s impact on the stock market is also minimal. Here’s what happens to the S&P 500 when a new Fed chairman takes office.
Last day of the previous Fed chairman:
- January 31, 2014: incoming Janet Yellen
- January 31, 2006: incoming Ben Bernake
- August 10, 1987: incoming Alan Greenspan
- August 3, 1979: incoming Paul Volcker
- March 7, 1978: incoming G. William Miller
- January 30: 1970: incoming Arthur Burns
- March 30, 1951: incoming William Martin
Here’s how the S&P 500 reacted to these new Fed chairmen.
January 31, 2014: Janet Yellen
The S&P was in the middle of a 6.1% “small correction”.
January 31, 2006: Ben Bernake
The next 8% “small correction” began 3 months later in May 2006.
August 10, 1987: Alan Greenspan
The S&P started to crash 2 weeks after Greenspan took office. This market crash was not Greenspan’s fault, so we cannot confuse causation with correlation.
August 3, 1979: Paul Volcker
The S&P began an 11.6% “small correction 2 months later in October.
March 7, 1978: G. William Miller
Miller became Fed chairman at the bottom of the S&P’s significant correction (1976-1978). The S&P rallied vigorously, and the next 8.1% “small correction” began 3 months later.
January 30: 1970: Arthur Burns
The U.S. stock market was in the middle of a bear market. This historical case does not apply to today. Our Medium-Long Term Model states that the S&P 500 is still in a bull market.
March 30, 1951: William Martin
The S&P began an 8.1% “small correction” more than 1 month later in May 1950.
The incoming Fed chairman’s impact on the stock market is minimal. Sometimes the stock market is on the verge of a big rally, and sometimes the stock market is about to begin a “small correction” very soon.