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 (in order of relevance) 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.
The Puzzling Pre-FOMC Announcement “Drift”
