WSJ’s Zweig: Fed Rate Policy, Not Election, Key for Stocks

Monday, 22 Oct 2012 08:23 AM

By Dan Weil

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All sorts of predictions are being made as to how different election results will affect the stock market.

Ignore them all, says Wall Street Journal columnist Jason Zweig. The real issue is what the Federal Reserve does with interest rates.

Since 1965, when modern Fed policy began, large stocks have generated average annual returns nearly 12 percentage points higher when the Fed was cutting rates than when it was raising them, according to a study led by Robert Johnson, a finance professor at Creighton University.

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During that same period, the difference in stock returns under Democratic and Republican presidents was less than 7 percentage points.

To be sure, since 1926, the Standard & Poor's 500 Index has fared about two times better under Democratic presidents than Republicans, according to Credit Suisse research.

But the first 40 years of that history pre-dates modern Fed policy, so it would certainly seem that the Fed is most important.

“The dominance of stock returns under Democrats might be a subtle kind of statistical illusion,” Zweig writes. “The research by Prof. Johnson and his colleagues suggests the Federal Reserve's monetary policy is far more important.”

Intuitively, Zweig’s reasoning makes sense. If the Fed keeps short-term rates at virtually zero, investors will need to seek out more risky investments than Treasurys to earn a decent return.

And stocks, particularly blue-chip, dividend-paying stocks, are among the most conservative alternatives available.

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

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