Markets may be excited by the idea of a Federal Reserve led by Janet Yellen, but if history is any indication, stocks could be in for a rough patch as she begins her tenure. Over the past 25 years, a distinct and disturbing trend has emerged—one that has been deemed the "curse of the new Federal Reserve chair."
"Newly installed U.S. central bank heads since 1970 see returns that are, on average, negative over the first three years of their tenure," writes out ConvergEx's chief market strategist, Nicholas Colas, in a Wednesday note. "You could have safely sat out the first three years of Volcker, Greenspan, and Bernanke's respective tenures and made all/even more of the market's return in the remainder of their time on the job."
To be sure, the performance over the start of Chairman Paul Volcker's, Chairman Alan Greenspan's and Chairman Ben Bernanke's terms tells a decidedly gloomy story. On average, the S&P was flat over the first month of the last three Fed chairs' time in office, and dropped about 10 percent in the first three years.
Colas favorably compares the "new Fed chair curse" to the slightly better-known "curse of the pharaohs," which is said to have plagued those who discovered Tutankhamun's tomb.
"The 'curse of the Fed chair' may be an actual thing," Colas writes, and "unlike Tut's curse, it actually makes some sense. Markets need time to understand how every Fed chair views the economy and sets monetary policy."
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Markets, then, may trade apprehensively or even negatively as investors try to gauge how the new Fed chair will set policy.
Other Fed experts say this theory could hold water.
"History shows that the market needs some time to adapt to a new Fed chair's style," Center for Financial Stability President Lawrence Goodman wrote to CNBC.com—while adding the caveat that "the market response is largely policy-, chairman-, and timing-dependent."
Colas says the curse could easily crop up again under Fed Vice Chair Janet Yellen, who will become the new Fed chair if confirmed by Congress.
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" 'Yellen's market' is going to have to deliver on the promise of 'Bernanke's market,' " despite "a myriad of issues for her to face," Colas writes. And this could be even trickier given that "investors clearly feel they have this market dialed in. ... That's a pretty fragile starting point for a new Federal Reserve chair."