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The Globe and Mail

How stocks have performed early in a new Fed chair's term

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013.

Jonathan Ernst/Reuters

Globe editors have posted this research report with permission of S&P Capital IQ. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following is excerpted from the report:

I had always heard that the S&P 500 performed quite poorly early in a new Fed chairman's first term in office. So I checked to see if this was true, or simply coloured by the Crash of 1987, which occurred fewer than three months into Alan Greenspan's tenure as head of the FOMC.

Since 1914, the S&P 500 fell an average 1.3 per cent during their first three months in office, heavily influenced by the stock market crash of 1987. Excluding Alan Greenspan's first year in office, however, the statement is untrue, as the S&P 500 would have risen an average 1.0 per cent in the first three months, even though the market slipped more than 20 per cent during the first three months of Eugene Meyer's term. In the six and 12-months into each chairman's first term in office, the S&P 500 recorded advances, on average, of 1.0 per cent and 6.0 per cent, respectively. From a frequency of price decline perspective, the first three months were the most tenuous at 54 per cent, but fell to 43 per cent after six months and then 36 per cent a full year later.

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History shows that the Fed initiated a rate-tightening program when the unemployment rate was at 6.5 per cent and higher five of the 13 times since 1946, and for good reason. In all observations, the unemployment rate at the end of the rate tightening cycle was either lower than or equal to where it was at the start. This difference indicates to me that the Fed does indeed need to make decisions based on expectations six or so months out, as the increases in rates were required to slow an economy that continued to add to payrolls even after an average of 25 months of rate increases.

So even though there is no guarantee that history will repeat itself, the Fed has ample precedent should they decide to raise rates at or near the 6.5 per cent unemployment level.

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