Kathy Valentine
CFA Institute - North America
434-951-5348
kathy.valentine@cfainstitute.org
Dori Pasternak
Ogilvy Public Relations - New York
212-880-5326
dori.pasternak@ogilvypr.com
When Interest Rates Go Up, Markets Go Down, New Study Finds
Study Points to Historically Lower-than-Average Returns and Higher Risk During Periods of Restrictive Monetary Policy
Charlottesville, VA, August 10, 2004 -- How might interest rate changes enacted by the Federal Reserve affect your investment portfolio? “Is Fed Policy Still Relevant for Investors,” a study conducted in June 2004 by researchers from CFA Institute, Northern Illinois University, University of Richmond and Texas Tech University, found a strong connection between U.S. monetary policy and global stock market returns. During times of restrictive monetary policy -- or rising interest rates – the study found the markets performed poorly, resulting in lower than average returns and higher than average risk. Conversely, periods of expansive monetary policy -- when interest rates are falling -- generally coincide with strong stock performance including higher than average returns and less risk.
“The Federal Reserve’s management of U.S. monetary policy has a strong bearing on the stock market. While Americans closely follow the impact of rising and falling interest rates on their mortgages, they should also consider the potential effect on their investment portfolios,” said Bob Johnson, Ph.D., CFA, executive vice president at CFA Institute. “In addition, certain sectors are much more sensitive than others to changes in Fed policy on interest rates.”
The research shows stocks averaged returns of 21.86% during periods of expansive monetary policy versus just 2.84% when Fed policy on interest rates was restrictive. While initial analysis suggests that the relationship between the two has lessened throughout the years, the results are nonetheless consistent across policy periods save for a single monetary period in the mid-1990s that coincided with the tech boom.
The authors also found that small cap companies and those in cyclical markets are particularly sensitive to changes in monetary policy. In fact, companies in sectors such as cyclical services, information technology and cyclical consumer goods such as automotive, media and hotel, restaurant and leisure industries performed 26% better during periods of expansive monetary policy. The effects of policy changes were least pronounced for sectors such as utilities and non-cyclical consumer goods such as food and drug retailers and food, beverage and tobacco companies.
The study utilizes 38 years of data and examines the relationship between monetary policy and stock market returns by evaluating both cross-sectional and time-series classifications. The cross-section evaluations include investment style by market capitalization and value/growth, sector analysis and country/region. The time-series consistency was evaluated by stock performance during each of the twenty-one separate monetary policy periods, focused on daily stock returns.
“U.S. monetary policy also has a significant influence on global markets, as evidenced by return patterns for five alternative stock indexes,” added Johnson. “These findings are consistent with the prominent role that U.S. economic conditions play on the prospects of non-U.S. companies.”
About CFA Institute
CFA Institute is the global, non-profit professional association that administers the Chartered Financial Analyst® (CFA®) curriculum and examination program worldwide and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 70,000 members in 121 countries and territories. Its membership includes the world’s 57,512 CFA charterholders, as well as 129 affiliated professional societies and chapters in 50 countries and territories.
CFA Institute is headquartered in Charlottesville, Va., USA, with additional offices in London and Hong Kong. CFA Institute was known as AIMR (Association for Investment Management and Research) from 1990 to early 2004, and before that was two separate organizations whose roots go back to 1947. More information may be found at www.cfainstitute.org or by calling 1-800-247-8132 or 1-434-951-5499 in the U.S., 44-207-712-1719 in London or 852-2868-2700 in Hong Kong.
Note to Editors
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