With Powell handing over the reins to the new chairman, Warsh, on May 15th, the market will re-evaluate his familiar communication style and monetary policy framework.
But do historical data offer any clues as to what a new Fed chairman means for the S&P 500?
Looking at the cumulative returns of the 12 Fed chair transitions since 1930, the picture isn't as bleak as one might think. The average return in the first month is 0.8%, with a median of 1.5%, both in positive territory. While the average shifts to negative 0.9% in the three-month window, the median remains just above zero. In the six-month and annual periods, the averages turn significantly positive at 6.2% and 5.6%, respectively.
In short, history suggests that new chair terms tend not to result in an automatic collapse, but rather a short-term increase in volatility followed by a recovery.
Of course, there can be very different stories behind these averages.
Greenspan experienced Black Monday two weeks after taking office and ended his first year with a 20.2% loss. On the other hand, the first year under Yellen yielded a return of 13.4%, while Volcker's yielded 16.1%. Bernanke's first six months saw almost zero return, and the real crisis only emerged 18 months later.
Looking at Bitcoin, the picture is more negative. Bitcoin lost nearly 70% in the first six months under Yellen, over 30% in the first six months of Powell's first term, over 60% by the end of the first year, and over 50% in the first six months of his second term in 2022.
Of course, directly attributing these losses to Bitcoin might be inaccurate. The May 2022 drop was largely due to Terra Luna, and the additional drop in November stemmed from the FTX bankruptcy.
This distribution suggests that performance is more dependent on inherited macroeconomic conditions and the global conjuncture than on the chairman's identity.
Risks specific to Warsh could further complicate this overall picture.
Although Warsh has been known for his hawkish profile throughout his career, he has recently softened his stance on interest rate policy. However, his firm position on balance sheet reduction could tighten liquidity conditions and put pressure on growth stocks, especially those trading at high valuations.
On the other hand, his close relationship with Trump could erode the perception of the Fed's political independence, creating an additional uncertainty premium in the market. Indeed, the emergence of Warsh's name led to a strengthening of the dollar and an initial sell-off in risk assets.
A stronger dollar could also put pressure on gold. Warsh's more favorable stance on shrinking the Fed's balance sheet could increase pressure on gold by drawing liquidity from the market, tightening financial conditions, and putting upward pressure on real returns.
In conclusion, the Warsh transition could increase volatility in the short term and trigger a "testing the new chairman" reflex in the market.
However, in the medium term, the main determining factors appear to be the inflation path, employment data, and global risk appetite. History portrays the new Fed chairman not as an automatic sell signal, but as a transitional period in which uncertainty is temporarily priced in.
