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Justin Sibears, Newfound Research September 26, 2018
There are a number of good academic papers on the subject. Ioannadis and Kontonikas (2006) is a good place to start. The paper investigates the impact of monetary policy shifts on equity returns in thirteen OECD countries [1] from 1972 to 2002.
Their analysis can be split into two parts. First, they explore whether there is a contemporaneous relationship between equity returns and short-term interest rates (i.e. how do equity returns respond to interest rate changes?) [2]. If there is a relationship, are returns likely to be higher or lower in months where rates increase?
Partially. When we analyze the data using a similar methodology and with data updated through 2018, we indeed find a negative relationship between monetary policy environment and forward 1-month equity returns. For example, annualized nominal returns in the United States were 10.6% and 8.8% in expansionary and contractionary regimes, respectively. The gap is larger for real returns – 7.5% in expansionary environments and 3.9% in contractionary environments.