Federal Reserve Monetary Policy and Industry Stock Returns

Recent studies identify stock return patterns associated with changes in Federal Reserve monetary policy. We find that these return patterns prevail across sixteen industry stock indices. However, significant cross‐industry variation exists as the apparel industry exhibits mean annual returns that are 50% higher under an expansive Fed policy than under a restrictive policy, while the same return difference for the oil industry is only 20%. This cross‐industry variation suggests that monetary conditions may be used by investors to estimate different expected returns across industries. Furthermore, the findings support the view that monetary considerations should be considered in ex ante asset pricing models such as the CAPM.