Empirical evidence of the impact of FOMC monetary policy on the U.S. equity market, 1990-2002.

ABSTRACT

This study re-measures the sensitivity of indices returns to selected macroeconomic factors. The results show three most influential factors--capacity utilization, consumer sentiment and depository reserves--are overall significantly priced as sources of risk. Unlike previous studies, CPI and PPI are not useful in terms of predicting indices returns. Furthermore, indices returns are mainly responding to the FOMC rate cuts than to rate hikes. In particular, NASDAQ is the most sensitive to rate cuts through the study period, 1990-2002. Finally, we show that different patterns of indices returns after rate cuts during prime bull market (1995-1999) and recent bear market (2000-2002), respectively. Thus, the overall results are consistent with the notion that the market situation, at least, partially affects the effectiveness of the Fed's monetary policy.

1. INTRODUCTION

The Federal Open Market Committee (hereafter, FOMC) has cut the interest rates eleven consecutive times in 2001 and one time in 2002. Starting the first cut in January, 2001 to the last cut in November, 2002, the Fed has cut a total of 5.25%. Accordingly, the benchmark Federal funds rate has dropped to 1.25%, which is the lowest level since 1961. Many economists, financial analysts, and investors are concerned whether such an aggressive monetary policy can effectively revive the sluggish U.S. economy. In particular, the tragic events of September 11, 2001 and recent geopolitical events (Iraq and North Korea) have made it more difficult to predict corporate earnings in any foreseeable quarters. In other words, the visibility of corporate financial outlook is too limited to provide investors with useful investment guidance. In light of many uncertainties involved in the current economic situation, the effectiveness of FOMC monetary policy is facing unprecedented challenges.

Despite a total of twelve rate cuts in 2001 and 2002 along with an activation of tax cut in 2001, three major market indexes DJIA, S&P 500, and NASDAQ have declined 12.38%, 17.12%, and 20.19%, respectively since the beginning of 2002 (The returns of three major indices are calculated from January 01, 2002 to May 27, 2003). The evidence suggests that the market shows a lukewarm response to the Fed's rate-cut actions. Traditionally, it takes at least six months to have the economy stimulated by a lower interest rate. Combined with the stimulus economy package proposed by the administrative office, some economists and financial analysts are optimistic about the prospects of the U.S. economy. However, facing with the weakening labor market, the deteriorating corporate capital spending, the contracting manufacturing activities, the declining U.S. dollar against Euro, and the rising budget deficit, other economists are cautious about the financial soundness of the U.S. market. In regard to current economic news and equity market condition, it is important to know how long the U.S. economy remains stagnate. Is 2003 to be the year when industries show the sign of recovery? Will the investors continuously maintain the healthy level of spending? Are there any catalysts to propel the indices to reach a higher level? Most importantly, to what extent of securities returns are attributable to rate cuts initiated by the FOMC in last two years?

We pursue three objectives in this study. First, in line with previous studies, we re-measure the implied equity risk premium of selected macroeconomic factors. Unlike previous findings, we do not find that CPI and PPI are the influential factors inversely affecting stocks returns. Instead, the evidence suggests capacity utilization, consumer sentiment as well as depository reserves are important sources of risk to explain much of variations of stocks returns. The second objective of this study is to identify which market index benefits the most from the changes of interest rates from time to time. Analyzing securities returns from 1990 to 2002, we measure the extent to which variations of securities returns can be explained by changes of the monetary policy. Further, we investigate whether securities returns present asymmetric responses to rate hikes vs. rate cuts. Our findings present the asymmetric response to changes of monetary policy, among which NASDAQ is most sensitive to rate cuts. The overall results support the notion that securities returns are primarily reacting to rate cuts than to rate hikes.

Finally, we examine the impact of changes of monetary policy on the equity market, measuring securities returns within twelve months after rate hikes (or rate cuts). Different indices are used as proxies to measure securities returns. In addition, we tend to analyze whether the market condition plays an important role while measuring securities returns after rate changes. The effectiveness of FOMC monetary policy is tested in both prime bull market (1995-1999) and recent bear market (2000-2002), respectively. In general, our findings report positive equity performance within twelve months after rate changes. But equity returns indeed present distinguished post rate changes performance throughout bull market and bear market. It suggests the effectiveness of FOMC monetary policy is partially affected by the market condition. The equity market provides an opportunity in which the investors make or lost trillions of dollars. Therefore, the importance of the effectiveness of the FOMC monetary policy cannot be overlooked. The implications of this study provide policy markers with detailed measurements about the impact of changes of monetary policy on the U.S. economy. Additionally, the empirical findings of this study enable investors and funds' managers to explore appropriate timing of investment.

The remainder of this study is organized as follows. Section 2 reviews the important previous research pertinent to this study. Section 3 provides brief review of the FOMC monetary policy and describes the selected macroeconomic factors along with the test hypotheses. Section 4 presents the empirical models as well as the empirical findings. Implications of the empirical results are also reported. Section 5 summarizes the major findings of this study and provides suggestions for future research.

2. LITERATUR REVIEW

We separate the previous studies into three areas: (2.1). the relation between changes of monetary policy and possible impacts on securities returns, (2.2). the relation among different macroeconomic factors, and (2.3). the link between macroeconomic factors and securities returns.

2.1 Changes of Monetary Policy and Possible Impacts on Securities Returns

In December, 1990, the Fed eliminates the reserve requirement on nonpersonal time deposits and Eurodollar Certificates of Deposits. The prior reserve requirement is 3%, which is estimated to be a total of $10 billion. The commercial banks, on average, earn abnormal returns because of such change (Cosimano and McDonald, 1998). The size of abnormal returns is proportionally related to the size of commercial banks. By contrast, the effect of reserve requirement changes is likely to be offset by other tools of monetary policy (Hein and Stewart, 2000). Thus, the changes of reserve requirement should be limited to depository institutions only. Expanding their original sample to include utility, communication, nondepository financial firms, brokers-dealers, and insurance firms, a later study suggests changes of reserve requirement carries little impact on equities returns outside the banking industry (Hein and Stewart, 2002). In other words, their new evidence suggests changes of reserve requirement are unlikely to have profound macroeconomic effect.

2.2 Relation Among Macroeconomic Factors

The relation between nominal (or real) interest rate and expected (or unexpected) inflation rate has been widely studied in finance research. Prior studies document the negative correlation exists between the expected inflation rate and expected real rate (Fama and Gibbons, 1982; Mishkin and Simon, 1995). Such finding is known as Mundell-Tobin Hypothesis (1963 and 1965), which suggests investors reallocate their investments from nominal assets to real assets. Accordingly, prices of real assets are pushed higher to yield lower returns. But, a recent study adapts cointegration model to report that the negative relation between expected real interest rate and expected inflation rate, in the long run, is not held in the U.S., the U.K., and Canada (Shrestha, Chen and Lee, 2002).

2.3 Macroeconomic Factors and Securities Returns

Many previous finance studies investigate how the changes of interest rates affect the securities returns, among which a study reports a 50% decline in expected stocks returns due to expected 10% increase in inflation, measuring by changes in T-Bill yields (Fama and Schwert, 1977). Other studies have shown the negative relationship between expected inflation and stocks returns (Fama, 1976; Chance and Lane, 1980; Lynge and Zumwalt, 1980). While, some other studies (Flannery and James, 1984; Bae, 1990) suggest the unexpected inflation also negatively affect stocks returns. A study done by (Domian, Glister, and Louton, 1996) presents twelve months of excess stocks returns after the drops in interest rates, while increases in interest rates have little impact on stocks returns. In addition, they also show the ability of changes in T-Bill yields to predict the following stocks returns. In line with prior study, Adams et al. have shown both CPI and PPI are inversely related to the major indices (Adams, Mcqueen, and Woods, 1999). Both CPI and PPI are viewed as indicators of inflation.

Besides the studies of interest rate and inflation rate and their influence on the stocks returns, a breakthrough study presents the spread between short-term and long-term interest rates, industrial production, or the spread between high-grade and low-grade bonds systematically affect stocks returns (Chen, Roll and Ross, 1986). Contrary to conventional wisdom, Chen et al. (1986) find that oil price is not an import economic factor to affect securities pricing. Recent studies have attempted to construct trading strategies based on spreads between earnings-price ratios and bond yields (Campbell and Shiller, 1998; Lander, Orphanides, and Douvogiannis, 1997; Shen, 2003). As for the money flow, the study reports if consumer spending increases, the major indices should follow as more money is circulated through the markets and into the retained earnings of publicly traded companies (Otoo, 1999).

3. FOMC AND SELECTED MACROECONOMIC FACTORS

3.1 Brief Overview of FOMC Monetary Policy

The Federal Open Market Committee (as known FOMC) is the policy-making body of the United States Federal Reserve, which is made up by twelve members. After reviewing recent reported economic data and discussing financial conditions, FOMC determines the appropriate monetary policy, which tends to cultivate steady economic growth and to foster long-run price stability. The monetary policy consists of three tools--open market operation, discount rate, and reserve requirement--undertaken by the Federal Reserve to influence the liquidity of money and cost of borrowing in the market. The Board of Governors of the Federal Reserve System decides the discount rate and reserve requirement, and the FOMC is responsible for open market operation.

Banks make money by lending out the money that is deposited with them. Loans are the financial products that banks sell in exchange for interests earned on these loans. However, banks can not loan out all the money that was deposited within the institutions because of the reserve requirement. The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios, which is specified in the Federal Reserve Board's Regulation D. Commercial banks or depositary institutions are permitted to borrow from their regional Federal Reserve Bank to solve their temporary financial difficulties or to meet their liquidity needs. Such rate charged by the Federal Reserve Bank is called discount rate, which is established by board of directors at each Reserve Bank. It is subject to the review and determination of the Board of Governors of the Federal Reserve System. Nevertheless, the discount rate is not same as Federal funds rate, at which depositary institutions borrow funds from other depositary institutions' balance at the Federal Reserve overnight.

Open market operations are referred to purchasing and selling the U.S. Government securities. This operation is undertaken by FOMC in an attempt to affect the Fed fund rate, which is determined in each scheduled FOMC meeting. Sometimes, the FOMC changes the Fed fund rate between the scheduled meetings if the Committee feels such action is warranted. Starting in 1994, FOMC announces changes in its policy stance (easing, tightening or neutral). Then, beginning in 1995, FOMC explicitly specifies its intended target Fed fund rate, and activating in 2000 the FOMC starts issuing statement right after the meeting is adjourned. The publicly scrutinized statement often includes the FOMC own assessments of future economic conditions and possible indications of future rate changes.

3.2 Macroeconomic Factors and Test Hypotheses

Monthly data of selected macroeconomic factors was taken from the Federal Reserve of St. Louis' economic research website. The chosen macroeconomic factors are CPI, PPI, capacity utilization, depository institution reserves, and unemployment rate. (All factors are seasonally adjusted). Consumer sentiment is the survey result done by University of Michigan. CPI is an index based on a basket of goods consumers usually purchase to satisfy daily needs (gas, groceries, etc.). PPI is an index similar to CPI that keeps an eye on production costs of certain goods as related to the same production of goods in the past. In line with prior studies, we hypothesize the inverse relationship between changes in CPI (PPI) and securities returns. Like other prior studies, we also adapt changes of Treasury securities to be other indicators of inflation. Monthly yields of three treasury securities are found through the Federal Reserve website: T-Bill (13-Week), T-Note (10-Year), and T-Bond (30-Year).

High productivity definitely contributes toward the rising equity market between 1992 and 1995. A study suggests experienced workers, advanced technology, accessible equity financing, and in particular high corporate capital spending are certainly attributable to the productivity gains (Ratajczak, 2002). However, the sustainable productivity is put into a test. Compared to 5% growth of industrial capacity in 1999, it only grows at 1% per year in 2002 due to plunging capital spending. Hence, we conjecture the higher capacity utilization results in higher indices returns, vice versa. As for consumer spending, it has counted for two-thirds of economic activities. When people borrow more money to buy houses or automobiles, bank (depository institution) reserves are reduced. Thus, we predict to have an inverse relation between depository institution reserves and securities returns. In other words, a decrease in depository institution reserves suggests more cash in the hands of consumers and spending is expected to increase. Accordingly, market indices move higher. The consumer sentiment index is based on a survey conducted by the University of Michigan spanning 5,000 households picked at random. A common misconception about the consumer sentiment index is that it portrays the average consumer's faith in the market. Actually, the index describes a consumer's willingness to spend. Hence, a positive correlation between consumer sentiment and indices returns is expected. Civilian unemployment rate is one of the popular macroeconomic variables people use to describe the welfare of the U.S. economy. Rises in unemployment are usually interpreted as a weight on the stock market. Conversely, a falling unemployment is likely contributing to stronger growth of the economy. One could assume that a strong negative relationship would exist between the major indices returns and the unemployment rate. Last but not the least, the data of the Federal fund rate is collected from FOMC. The decisions on the Fed rate from all scheduled meetings as well as between scheduled meetings are recorded.

4. EMPIRICAL MODEL AND EVIDENCE

4.1 Multiple-Factor Regression Model

The multiple-factor time-series regression model is adapted to ascertain whether selected macroeconomic factors can explain variations of securities returns. In this study, we choose different indices to be the proxies of securities returns. Monthly returns of DJIA, NASDAQ, S&P 500, Russell 3000, Value Line Index, and Philadelphia Gold and Silver Index (XAU), from 1990 to 2002, are calculated. The Philadelphia Gold & Silver Index is included in an attempt to distinguish it from the other equity indices. Precious metals have long been considered a valuable defense opportunity, outperforming conventional investments in times of economic and geopolitical uncertainty. To many aspects, the precious metal can be considered as the "hedging" investment compared to equity investment. Thus, we tend to explore whether such characteristics presented during our study period. All macroeconomic factors are collected from different sources and monthly changes of them are calculated.

(1) [R.sub.t] = [alpha] + [[beta].sub.1]CP[I.sub.t] + [[beta].sub.2]PP [I.sub.t] + [[beta].sub.3]C[U.sub.t] + [[beta].sub.4]C[S.sub.t] + +[[beta].sub.5]D[R.sub.t] + [[beta].sub.6]U[E.sub.t] + [[epsilon].sub.t]

where

[R.sub.t] the monthly returns of indices.

CP[I.sub.t] the monthly changes of CPI.

PP[I.sub.t] the monthly changes of PPI.

C[U.sub.t] the monthly changes of capacity utilization.

C[S.sub.t] the monthly changes of consumer sentiment.

D[R.sub.t] the monthly changes of depository reserves.

UE the monthly changes of unemployment rate.

[[epsilon].sub.t] random error with mean zero.

4.2 Indices vs. Macroeconomic Factors

Table 1 presents results from multi-factor time-series regression over the whole study period. As shown in Table 1, all indices, except for few exceptions, report negative coefficients to CPI (and PPI), ranging from -2.07 to -0.71 (-0.57 to -0.003). The negative coefficient on CPI (and PPI) is consistent with the findings reported in previous studies, that is, inflation negatively affects equity investments. However, the overall t-stats are not significant. It is also noticed that the response to changes in CPI is almost three times larger than that to changes in PPI. The evidence implies that investors are more concerned about increasing CPI than increasing PPI because rising manufacturing cost may be transferred to consumers through higher price charged on merchandise and goods. On the other hand, we also observe the gold/silver index reacts positively to changes in PPI. Despite its insignificant t-stat, the precious mental index indeed presents a different response to inflation. The evidence supports our prior argument that gold/silver is used as "hedging" investment to preserve the value of wealth when inflation is threat. Prior research suggests using treasury securities as another measure of inflation, thus, securities returns and changes of treasury securities yields are expected to be negatively related. However, T-Bill, T-Note, and T-Bond have reported mixed results so we do not report the results in this study.

To our surprise, we do not find expected positive coefficient between indices returns and capacity utilization. All the coefficients are negative, and majority of them are statistically significant at 5%. One explanation to this "anomaly" is that skillful workers with the help of advanced technology permits corporations manufacture same or greater amount of goods at relatively lower capacity utilization. In other words, lower capacity utilization is no longer viewed as synonym of lower economic growth. Likewise, the market indices report mixed results to changes in unemployment rate. Our findings suggest the securities returns show almost no response to any changes in unemployment rate, which is contradictory to the hypothesized strong negative relation between indices returns and strength of labor market.

The most important finding of our study is that all the indices (except for gold/silver index) statistically and negatively respond to changes of depository reserves throughout the whole study period. As previously stated, this factor gives us a gage on how much money consumers borrow and subsequently spend to facilitate the growth of economy. Hence, our empirical evidence suggests that depository reserves is a better indicator than other chosen macroeconomic factors in an attempt to predict securities returns. This result is also substantiated by positive regression results of consumer sentiment reported in Table 1. Consistent with our hypothesis, an increase in consumer sentiment leads to higher consumer spending. As a result, the overall indices returns move higher. The result indicates indices returns increase with consumer sentiment, in particular, Value Line Index reports the most significant t-stat. Noticeably, the gold/silver index is negatively related to consumer sentiment. Taken together, higher consumer sentiment leads to money moving out of precious metal back to equity market.

4.3 Indices vs. FOMC Monetary Policy

A recent research documents that a change in the Federal fund rate is followed by a move in the opposite direction concerning stock market returns (Sack, 2002). Securities returns are asymmetrically responding to changes in rate hikes vs. rate cuts (Domina et al., 1996). Hence, we propose to investigate the impact of FOMC monetary policy by separating rate hikes from rate cuts in the empirical model. As shown in equation (2), dummy variable of "1"is assigned for the month when the Fed raises (or cuts) the Federal fund rate. Alternatively, actual changes of the Fed rate are used as independent variable in equation (3).

(2) [R.sub.t] = [alpha] + [[beta].sub.1]FOM[C.sub.t](Dummy) + [[epsilon].sub.t]

(3) [R.sub.t] = [alpha] + [[beta].sub.1]FOM[C.sub.t](Actual) + [[epsilon].sub.t]

where

[R.sub.t] the monthly returns of indices.

FOM[C.sub.t](dummy) "1" assigned for rate hikes (or rate cuts), "0" otherwise.

FOM[C.sub.t](actual) actual hikes (or cuts) of the Fed rate.

[[epsilon].sub.t] random error with mean zero.

Regression results of FOMC monetary policy using dummy variable of "1" are overall insignificant. Nevertheless, the regression results of equation (3) provide further evidence of the asymmetric securities returns in response to rate hikes vs. rate cuts. As reported in Table 2, the indices returns are inversely related to changes of the Federal fund rate, i.e. changes of monetary policy. Most importantly, our results show that indices returns are mainly responding to rate cuts rather than to rate hikes. Specifically, NASDAQ has largest coefficient of -8.98 responding to a rate cut.

It suggests that investors can benefit most by investing in NASDAQ index if they contemplate there is a possible rate cut in near future. Moreover, the magnitude of securities returns responding to rate cuts is greater than that reported in an earlier study (Domina et al., 1996).

4.4 The Impact of Monetary Policy in Bull Market vs. Bear Market

As shown in Table 2, the indices returns are significantly affected by rate cuts through the whole study period. A further analysis was done to find the effects of the Fed rate cuts during both the prime bull market (1995-1999) and recent bear market (2000-2002). Presumably, the changes of the Fed rate are expected to affect the equity market afterwards. Thus, we calculate the indices returns twelve months after rate hikes (cuts). Except gold & silver index, twelve months indices returns range from 6% to 17% from 1990-2002 after rate hikes. While, the indices experience twelve-month returns from 1% to 16% over the same period after rates cuts. Both rate hikes and rate cuts seem to have positive effect on one-year indices returns afterwards.

Accordingly, we measure indices returns in bull market and bear market, respectively. We tend to examine whether stocks returns within the post-rate changes period is affected by the market conditions. Panel B of Table 3 reports, except for gold/silver index, indices have gained significantly from 4% to 70% after rate cuts from 1995 to 1999. However, rate cuts fail to yield the same effect in the recent bear market from 2000 to 2002. Except for 28% gain in gold/silver index, other major indices suffer loss from--11% to -34%. The evidence suggests the effectiveness of money policy has been diminished in bear market. Investors are likely to think that the excessive measure is only taken when the economy is in its extremely worst stage. Hence, we may argue that the aggressive rate cuts starting in 2001 only dampens the investors' confidence in the state of economy. Noticeably, the performance of gold/silver index is opposite to those of other indices. In particular, precious metal is viewed as a "safe heaven" during the economic downturn. As shown in Table 3, gold/silver index reports an outstanding return of 28% after rate cuts over a period of 2000-2002. Despite the tightening monetary policy during prime bull market, rate hikes seem to have no adverse impact on equities returns. Such unusual phenomena may be explained by the surging interest of investing in internet, telecom or other "high tech" speculative stocks. Securities prices are driven up by irrational investing. As a result, the intent to combat inflation via higher rates has been undermined.

5. CONCLUSIONS

Since 1990, the FOMC has maintained its influence role via its maneuver of monetary policy. But, the recent sluggish equity market starts casting doubt about the usefulness of the FOMC strategy. Would there be other macroeconomic factors attributable to indices performance? Or would the monetary policy affect indices returns differently in bull market vs. bear market?

The uses of indices returns as proxies for securities returns allow us to explore how securities performance respond to changes of macroeconomic factors over time. We find contradictory results or little evidence that capacity utilization or unemployment rate are useful economic factors in predicting securities returns. We also show that, as predicted, securities returns on average decrease as CPI and PPI increase but the results are not significant. The gold/silver index presents a positive relationship as PPI increase, which is consistent with our hypothesis of viewing precious metal as the "hedging" alternative to equity investment. The major finding of our study is to report the significant and inverse relation between indices returns (excluding gold/silver index) and depository reserves. The evidence suggests that lower depository reserves as a result of strong consumer spending propel higher equity returns. Such finding is also validated by the positive response to increasing consumer sentiment, which measures the consumers' willingness to spend. Moreover, this study documents an additional effect: the ability of changes of monetary policy to predict subsequent equities returns. NASDAQ, Russell 3000, and Value Line are top three indices, which are more sensitive to rate cuts.

In addition, the magnitude responding to rate cuts are greater than the previous documented findings. We also find that, except for gold/silver index, all indices are associated with positive returns within twelve-month post rate-hike and rate-cut periods during the whole study period: 1990-2002. Especially, the significant indices returns are reported in the prime bull market, 1995-1999. On average, NASDAQ, DJIA, and S&P Index report twelve-month return of 70%, 24%, and 21%, respectively after rate cuts. On the other hand, rate cut fails to yield the positive indices returns instead results in significant loss from 2000 to 2002. This latter evidence suggests that the effectiveness of aggressive monetary policy is relatively minimal during the recent bear market. Despite the Fed raises rates to curtail consumer spending, indices still present positive returns within twelve months after rate hikes from 1995 to 1999. Thus, the overall results are consistent with the notion that the market situation, at least, partially affects the effectiveness of the Fed's monetary policy.

TABLE 1
Summary of Coefficients of Macroeconomic Factors

Monthly indices returns are regressed on monthly changes of CPI,
PPI, CU (Capacity Utilization), CS (Consumer Sentiment), DR
(Depository Reserves), and UE (Unemployment Rate). The sample period
is from 1990 to 20002. Estimated coefficients of each macroeconomic
factor are reported.

                             Major Indices

Macroeconomic    DJIA      S&P 500     NASDAQ    Russell 3000
   Factors

     CPI        -0.71      -0.78      -1.44         -0.90
     PPI        -0.57      -0.16       1.49         -0.003
     CU         -1.95 **   -1.83      -2.46         -1.83 **
     CS         -0.08       0.09 **    0.21          0.10
     DR         -0.30 **   -0.25 **   -0.57 **      -0.26 **
     UE         -0.14      -0.15      -0.16         -0.14

                   Major Indices

Macroeconomic   Value Line   Gold/Silver
   Factors

     CPI          0.07         -2.07
     PPI         -0.29          0.93
     CU          -0.95 **      -1.79
     CS           0.19 **      -0.09
     DR          -0.37 **       0.05
     UE          -0.07          0.30

* Significant at 10% level.

** Significant at 5% level.

TABLE 2
Major Indices Returns Reponses to Rate Hikes and Rate Cuts

Monthly indices returns are regressed on actual changes of the
Federal fund rate. The sample period is from 1990 to 20002.
Estimated coefficients responding to changes of FOMC monetary
policy are reported.

                             Major Indices

     FOMC          DJIA       S&P      NASDAQ     Russell 3000
Monetary Policy               500

  Rate Hikes      -1.58     -0.30      -0.95        -0.40
   Rate Cuts      -3.47 *   -4.91 **   -8.98 **     -5.06 **

                       Major Indices

     FOMC         Value Line   Gold/Silver
Monetary Policy

  Rate Hikes       -0.46          -2.07
   Rate Cuts       -6.39 **       -2.24

* Significant at 10% level.

** Significant at 5% level.

TABLE 3
Twelve-Month Major Indices Returns Within Post Rate-Hikes / Rate-Cuts
Period

Twelve-month indices returns are calculated for all the indices after
each rate hike or rate cut. Three time periods are studies--1990-2002,
1995-1999, and 2000-2002, respectively.

Panel A: Twelve-month Major Indices Returns Within Post Rate-Hikes
Period

  Different     DJIA   S&P 500   NASDAQ   Russell   Value   Gold/Silver
   Periods                                 3000      Line

  1990-2002     15%      13%       17%      13%      6%        -7%
  1995-1999     25%      24%       36%      23%      14%        2%
(Bull Market)
  2000-2002     -2%      -7%      -16%      -6%      -7%       -17%
(Bear Market)

Panel B: Twelve-month Major Indices Returns Within Post Rate-Cuts
Period

  Different     DJIA   S&P 500   NASDAQ   Russell   Value   Gold/Silver
   Periods                                 3000      Line

  1990-2002       7%      4%       16%       6%       1%          7%
  1995-1999      24%      21%      70%       20%      4%         -6%
(Bull Market)
  2000-2002     -11%     -18%     -34%      -17%     -19%        28%
(Bear Market)

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Dr. Jasmine Yur-Austin earned her Ph.D. at University of California, Irvine in 1995. Currently, she is an associate professor of Finance at CSULB.

Jonas Neubauer is a Finance major at California State University of Long Beach currently working towards his bachelors degree (emphasis in investments).

Khai Nguyen is a Finance major at California State University of Long Beach currently working towards his bachelors degree (emphasis in investments). Mark Veale earned his Bachelor of Science at California University Long Beach in 2003. Currently, he is attending a truth and service Christian training.