Common wisdom holds that Federal Reserve policy makes a big difference to equity investors–the Fed represents, many believe, the ultimate market traffic light. If the Fed raises short-term rates, the signal turns red and the market slams on its brakes; if the Fed loosens (by embarking on another round of Quantitative Easing, as Goldman Sach’s Chief Economist, Hatzius is calling for), the light turns green and the market can continue on pedal-to-the-metal. Everyone takes this mental model for granted, but is it really true?
The simple answer: “Not at all.” Let’s look at the evidence.