Probably not, according to historical episodes. Jerome Powell is due to take over Janet Yellen’s role as Fed Chair starting on February 3rd, 2018. Powell will take charge of a prestigious position only occupied by 10 predecessors since 1934. Naturally, we’re keen on discovering whether the market tests newly-appointed Fed Chairs once they hold office and if this results in any predictable patterns or tendencies.
A historical study of S&P 500 Index price moves around historical Fed Chair term starting dates shows that stock market had a major correction only after Alan Greenspan took office, selling off by 27% after 3 months and 24% after 6 months, respectively. This particular episode coincided with Black Monday where markets sold off for over 20% on October 19th, 1987. One bullish observation from the study is that stocks tended to rally over 2% on average just 1 month after a new Fed Chair. Comparing to all historical 1-month time periods since 1934, that lies on the 62nd percentile of all 1-month S&P 500 returns – a statistically significant result.
On the other hand, after 3 months of a new Fed Chair taking office, stocks were historically back to flat, on average down -0.59% from our sample size of 9 episodes. In contrast to the 1-month observation, this cumulative 3-month return falls on the 38th percentile of all historical 3-month time periods, a bearish signal. By aggregating all these historical episodes from the normalized S&P 500 Index, stocks have a tendency to rally and peak around 40 days after the Fed Chair takes office, followed by a big market correction lasting for about 2 months. This is the most noticeable pattern seen by aggregating all historical transitions of the Fed Chair position, although it’s noteworthy to caveat this by highlighting the impact October 1987 has on the results. However, looking at the Normalized price move of the S&P 500 Index, one can glean insights into probably paths the market can take.
If the new Federal Reserve Chairman Jerome Powell determines to accelerate tightening monetary policy from the current gradual path, investors should be cautious about potential major market correction. This is notable as the current overall stock market positioning is rather vulnerable, according to CrowdThnk’s measure with many stocks near their highs in crowded and overweight market positioning. However, given Powell’s predilection to follow Yellen’s decisions (no dissensions with any majority Fed Decision during his tenure) along with his non-academic background and the plethora of vacancies on the Fed’s Governing Board, it is unlikely that he’ll veer paths into uncharted territory with any radical policies.
Here are the Historical Fed Chair transitions with detailed stock market data bucketed by time periods before and after the Transition Date (T):
Here are the average returns and place amongst the Normal Distribution of all similar-period returns: