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The insightful investor is skeptical of factoids.

And for good reason!

If you want to use history as a guide, care is required. I thought this was pretty obvious until my morning watching of CNBC in Davos (it doesn't seem the same without Maria) showed Andrew Ross Sorkin interviewing Kenneth Rogoff. This seemed interesting, so I turned off the mute button and backed up the TIVO. Here was someone who could really grill Rogoff about the research findings that are now the source of so much controversy.

What a disappointment! There were no hard-hitting questions. Even worse, Sorkin uncritically accepted as fact a silly bearish idea about the Fed. CNBC has trimmed the interview to exclude that portion, but I have it on TIVO. Sorkin says that whenever there is a new Fed Chair, the market corrects within the next six months.

Let us examine that Factoid.

Background

A couple of weeks ago a Famous Bearish Pundit noted on Twitter than when there was a change in the Fed Chair, the market usually declined. Someone asked the FBP when he expected the correction. He replied that it was not a prediction, it was a fact.

Well!

There is a lot of buzz about not doing predictions, but most of the history cited is offered with that in mind. The basic notion is that history will repeat, and that these simple bivariate relationships are relevant to your trading or investing.

FBP moved on, but here is a source that took up the argument.

The average maximum drawdown in stocks during the first six months of a new Fed Chairman has been 16%. This is consistent with other indicators that suggest an elevated risk of correction as we move through 2014.

Analyzing a Factoid - First Cut

Whenever you are presented with a proposition like this, the insightful investor should be seeking a basis for comparison. Suppose for example, that the maximum drawdown for stocks is ALWAYS 16% over the next six months. In my own work, I always warn investors that this level of change is a normal fluctuation, having nothing to do with the fundamentals of the market. What you really need is a 2 by 2 table, with Fed leadership change and No Fed leadership change on the horizontal axis, traditionally reserved for the independent variable. Then we can see if there is a real difference in results. Should it be average result? Maximum drawdown? What time period?

You can be sure that your pundit will pick the case that favors his viewpoint.

Second Cut

The insightful investor digs a little deeper. I always look at the data. Statistical experts regard this as getting your hands dirty! Instead of blindly accepting a statement about changes in the Fed Chair, you ask what data might be relevant. Let us start by looking at the history of changes, from Wikipedia.

#

Chairman[7][8]

Years in office

President(s) with whom they served[9]

1

Charles S. Hamlin

August 10, 1914 -
August 19, 1916

Woodrow Wilson

2

William P. G. Harding

August 10, 1916 -
August 9, 1922

Woodrow Wilson
Warren G. Harding

3

Daniel R. Crissinger

May 1, 1923 -
September 15, 1927

Warren G. Harding
Calvin Coolidge

4

Roy A. Young

October 4, 1927 -
August 31, 1930

Calvin Coolidge
Herbert Hoover

5

Eugene Meyer

September 16, 1930 -
May 10, 1933

Herbert Hoover
Franklin D. Roosevelt

6

Eugene R. Black

May 19, 1933 -
August 15, 1934

Franklin D. Roosevelt

7

Marriner S. Eccles

November 15, 1934 -
January 31, 1948[10]

Franklin D. Roosevelt
Harry S. Truman

8

Thomas B. McCabe

April 15, 1948 -
March 31, 1951

Harry S. Truman

9

William McChesney Martin, Jr.

April 2, 1951 -
January 31, 1970

Harry S. Truman
Dwight D. Eisenhower
John F. Kennedy
Lyndon B. Johnson
Richard M. Nixon

10

Arthur F. Burns

February 1, 1970 -
January 31, 1978

Richard M. Nixon
Gerald R. Ford
Jimmy Carter

11

G. William Miller

March 8, 1978 -
August 6, 1979

Jimmy Carter

12

Paul A. Volcker

August 6, 1979 -
August 11, 1987

Jimmy Carter
Ronald W. Reagan

13

Alan Greenspan

August 11, 1987 -
January 31, 2006[11]

Ronald Reagan
George H.W. Bush
Bill Clinton
George W. Bush

14

Ben Bernanke

February 1, 2006 -
January 31, 2014

George W. Bush
Barack Obama

15

Janet Yellen

February 1, 2014 -

Barack Obama

Does anyone really think that the depression-era results are meaningful?

It should be obvious that most of this history is totally irrelevant - at least through 1970. Arthur Burns came in to deal with inflation, and it is natural for this to have a negative market effect. Miller had a brief and unhappy tenure. Volcker had a mission like that of Burns. Greenspan came in right before the 1987 crash, which had nothing to do with the change in the Fed Chair.

Any open-minded person who looks at this history should realize that the change in Fed Chair has little to do with stock market prospects.

And to Emphasize

If there were ever an occasion when it made no difference at all, this would be the time. Yellen has been Vice-Chair, supportive of all policies, and pledged to continuation. Bernanke clone is sometimes mentioned, although I personally expect her to show some independence.

Investment Conclusion

My final words will be familiar to regular readers. There is a vast disparity between what is popular in the media and what will help your investments. Popular sources are rewarded for page views and ratings. The average investor is not watching, so the ratings come from a different source.

Of course there could be a market correction - something that pseudo-experts were calling for with assorted messages during all of last year. We will probably see one during 2014. It will have absolutely nothing to do with the transition in the Fed.

The insightful investor knows better!

Source: Fight The Fed Factoid