This paper shows that monetary policy decisions have a significant effect on investor sentiment. The effect of monetary news on sentiment depends on market conditions (bull versus bear market). We also find that monetary policy actions in bear market periods have a larger effect on stocks that are more sensitive to changes in investor sentiment and credit market conditions. Overall, the results show that investor sentiment plays a significant role in the effect of monetary policy on the stock market.

We examine stock index futures and Treasury futures around the release time of 30 U.S. macroeconomic announcements. Nine of the 20 announcements that move markets show evidence of substantial informed trading before the official release time. Prices begin to move in the “correct” direction approximately 30 minutes before the release time. The preannouncement price drift accounts on average for approximately 40% of the total price adjustment. This implies that some traders have private information about macroeconomic fundamentals. Preannouncement drift might originate from a combination of information leakage and superior forecasting that incorporates proprietary data.