Using 38 years of data, we show that U.S. monetary policy has had, and continues to have, a strong relationship with security returns. Specifically, we find that U.S. stock returns are consistently higher and less volatile during periods when the Federal Reserve is following an expansive monetary policy. Further, firms considered to be more sensitive to changes in monetary conditions, such as small firms and cyclicals, exhibit monetary-policy-related return patterns that are much more pronounced than average. Lastly, the influence of U.S. monetary policy is shown to be a global phenomenon, as international indices have return patterns similar to those for the U.S. market. Overall, our evidence suggests that investment professionals should continue to use monetary conditions when performing fundamental analysis of both U.S. and international securities.
Copyright © 2005 CFA Institute. Article first published: Jan/Feb 2005. DOI: 10.2469/faj.v61.n1.2685.
The definitive version is available at: http://www.cfapubs.org/doi/pdf/10.2469/faj.v61.n1.2685
Conover, C. Mitchell, Gerald R. Jensen, Robert R. Johnson, and Jeffrey M. Mercer. "Is Fed Policy Still Relevant for Investors?" Financial Analysts Journal 61, no. 1 (January/February 2005): 70-79. doi:10.2469/faj.v61.n1.2685.
Conover, C. Mitchell; Jensen, Gerald R.; Johnson, Robert R.; and Mercer, Jeffrey M., "Is Fed Policy Still Relevant for Investors?" (2005). Finance Faculty Publications. Paper 35.