Quantifying a Brutal First Week for Jerome Powell

Janet Yellen's Fed farewell heralded the start of a wild, volatile ride for stocks

by Bernie Schaeffer

Published on Feb 13, 2018 at 10:08 AM

There has been some debate on Wall Street lately as to whether the "changing of the guard" at the Federal Reserve triggered the major stock market drop in February. Coincidence or not, we know that Jerome Powell was sworn in as the head of the Federal Reserve on Monday, Feb. 5, which wound up being the Dow Jones Industrial Average's (DJI) worst single-session point loss on record. The stock market's "fear barometer," the good ol' CBOE Volatility Index (VIX), subsequently had its biggest one-day surge ever.

While the easy route for those who must assign blame is to point the finger at Powell, those same accusers should remember that the proverbial blood was in the water even before Janet Yellen left office. As Schaeffer's Senior V.P. of Research Todd Salamone noted in a recent Monday Morning Outlook, more than a fair share of media outlets were hyping up stock market "warning signs" in January, suggesting the recent sell-off of a (very much widely known to be) overbought market may have very well been a self-fulfilling prophecy of sorts.

It is against this backdrop -- and the backdrop of Powell already being compared to Eugene Meyer, leader of the Fed during the start of the Great Depression -- that we decided to take a look at how the S&P 500 Index (SPX) tends to perform after new Fed chairs take office, and where Powell fits in thus far.

spx after new fed chairs 1


spx after new fed chairs vs anytime


It's interesting to note that stocks typically outperform in the month after a new Fed leader, per data from our Quantitative Analysis department. One week after the start of a new Fed chair's term, the SPX was up 1%, on average, and higher 64% of the time -- that's compared to an average "anytime" S&P gain of 0.1%, with a win rate of 56%, looking at data since 1928. Considering last week's major stock losses, however, Powell is pacing for the worst start since the notorious Mr. Meyer.

Two weeks out, the index was up an average of 2% -- about seven times the average anytime two-week gain -- and higher 82% of the time. It would take a lot of work by stock market bulls over the next week to achieve that monster 10-day performance. One month after a new Fed chair, the S&P was up 1.9% -- more than three times the norm – with a better-than-usual win rate of 73%.

The three-month marker sticks out like a sore thumb, though. It's the only point at which the S&P's win rate fell under 50%, and the index averaged a loss of 1.5% -- that's compared to an average anytime three-month gain of 1.9%, with 63% positive. Of course, it should be noted that those figures are heavily weighted by Meyer's infamous tour of duty, as well as the Black Monday crash that occurred on Alan Greenspan's watch. And things tend to stabilize six months and one year into a new Fed head, with slightly below-average S&P returns and positive rates in line with the status quo.

While it's too soon to tell whether Powell's first year in office will be more Meyer-esque or whether it will stabilize after a rough start, as it did with Ben Bernanke, one thing the new Fed leader does have in common with his predecessors is volatility. As you can see by the "Standard Deviation" columns above, stocks tend to be more volatile than usual when a new central bank figurehead is sworn in, with the average negative returns much steeper than usual at most checks.


Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, February 11.

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