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September 13, 2016

Can central bankers lie?

Central bankers manipulate markets – this is a conspiracy theory we hear often. But is it true? Have central banks really rigged markets and pushed stocks to all-time highs, disconnected from reality? The former member of the Federal Reserve Board, Kevin Warsh, has surprisingly implied that the Fed is propping up markets. He wrote in a Wall Street Journal article:

„A simple, troubling fact: From the beginning of 2008 to present, more than half of the increase in the value of the S&P 500 occured on the day of Federal Open Market Committee (FOMC) decisions“

How to lie with statistics

Is Kevin Warsh telling the truth? Is the Fed the only game in town? Well, at face value his comment is correct. Since the start of 2008, the S&P 500 is up 78% including dividends. The FOMC meets 8 times per year to announce their monetary policy decision. If we take just those 8 days every year since 2008, then the S&P 500 is up 38% or approximately half of the total return.

As Churchill is supposed to have once said „I only believe in statistics that I doctored myself“, let’s take a closer look at the data. If we use 2008 as a starting, point, then yes, it looks like half of the gains are Fed driven. But here is the rub: if we change the starting date, the picture becomes much less clear. If we take the following years as a starting point, then suddenly the FOMC days account for a very small part of the overall S&P 500 gains.

 FOMC daysS&P 500Profits on FOMC days as % of S&P 500 profits
Since 200838.3%78.1%49%
Since 200922.3%180.7%12%
Since 201012.3%122.9%10%
Since 201110.9%94.1%12%
Since 20129.1%90.%10%
Since 20133.9%64.1%6%

Bottom line: Lies, damned lies, and statistics

One of the most common ways to distort the truth in investing is to move the goal posts. Cherry picking starting or ending dates is the red flag of all red flags. By massaging the numbers, you can get the truth to tell any lie you want. It is very distressing to see a former Fed governor playing so fast and loose with numbers like this.

We are not trying to suggest that the Fed has no implications on markets. They surely do. But it is not the single most important factor that the conspiracy theorists want to make you believe. The US equity market may be expensive today but we should not forget that the fundamentals have also improved a lot compared to 2007: retail sales are higher, so are employment numbers, total number of cars sold and also corporate profits.

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