An Economic Profit Analysis of Monetary Information Shocks: Implications for Active Investors and Portfolio Managers

We examine monetary information shocks in the context of wealth creators and wealth destroyers using an economic value added (EVA)-style analysis. We find that the impact of monetary information shocks is more pervasive than previously thought and that such Fed-induced shocks are reflected in stock returns over the past quarter-century, 1995–2019, for companies that have negative economic earnings (ROIC < WACC), notably the corporate restructuring companies, as well as companies with positive economic profits (ROIC > WACC), but in an underinvesting position. The stocks of value-creating growth companies with positive EVA momentum are somewhat less impacted by monetary information shocks. Moreover, the excess return effects of monetary policy shocks are present across the EVA styles for subperiods surrounding the 2008-2009 Global Financial Crisis.