Market Reaction to Fed Days
This is the first in a series looking at the market’s reaction to scheduled Fed days.
How the market reacts to FRB meets is of course a complicated dance involving the state of the economy and meeting investor expectations, but for the purpose of this post, I’m just looking at it as a seasonality event like any other.
Note: these results will be included on our monthly Seasonality Map.
The table above shows how the S&P 500 (VFINX) performed on scheduled Fed days when the target Fed Funds Rate was increased, left unchanged, or decreased.
Geek note: some Fed meets cover two days and in those cases I’ve only included the second day. I’ll show why in a future post.
A couple of thoughts…
First, we’re dealing with a low number of observations so all stats need to be treated with an extra dose of skepticism. Slicing and dicing the data much further is going to be very prone to curve-fitting.
Second, from this 30,000 foot view, the market has performed well regardless of the Fed’s decision to change rates. On the surface, it would appear scheduled FRB meets have been, in and of themselves, bullish.
How consistent has that bullishness been?
[logarithmically-scaled]
The graph above assumes an investor was long the S&P 500 (from the previous close) on all scheduled Fed days (red, left axis) from 1994. For comparison I’ve included buy & hold (VFINX, grey, right axis).
Note that the two lines are using different scales, so the chart is NOT showing that this strategy would have beaten buy & hold.
What it is showing is that this approach was pretty consistently bullish over the entire sample. Exceptions were 2000-02 and 2005-06 when the approach was not particularly predictive.
Note: click for a list of upcoming scheduled FRB meetings.
What’s Next
I’m not sure yet.
I think looking at the broader trend (bullish/bearish/sideways) at the time of the meet would be interesting. I’d also like to show some stats on the day-before/after a meet.
I ran similar numbers way back in 2008 on this blog, but then I let them slip off into the void. After this round I want to add the observation to the monthly Seasonality Map so we can keep tabs on it.
As always, more to follow.
Happy Trading,
ms
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Filed under: Time-based, Treasuries & Interest Rates | 13 Comments
Michael,
It seems to me that it would useful to look at what the market did th day following a Fed meeting. Especially if you are going to break down the returns by their decision. My reason for stating this is the Fed decision I’d released at approximately 1:15 central time and the markets close two hours later. Consequently, if the market was up 2% pre Fed announcement and went down 1% after the announcement your study would show a positive reaction to the decision when actually the market declined after it.
Al
RE to Al: good thought sir. In prep for my next post I ran the numbers for ALL days after Fed meets and there was zero edge. Sounds like I need to run it again based on the rate decision. More to follow. michael
I’d be very interested in knowing if the typical “runup” on Fed Days occurs more before or after the actual rate announcement. Don’t know if you have the data and the inclination to pursue this but you could contrast the market’s performance from open-to-14:15 ET to that of 14:15-16:00. Do traders typically “sell the news” or “buy the news”?
RE to Phil: I’m not an intraday trader and unfortunately don’t have the right data on hand to run this test. If anyone would like to contribute to the cause, I’d be more than happy to put it through the paces. michael
Two questions:
1) Does the red return line include only scheduled meetings?
2) Is that same line invested in cash on non-Fed days?
RE to mlb: the first question is answered multiple times in the post, yes, only scheduled meets. And yes, non-Fed days are spent in cash (and I’ve assumed zero return on cash).
Also mentioned in the post (but I’m mentioning it here because I think I know where the two questions above are going) is that the two lines are using two different scales, so it’s NOT showing that this “strategy” beats B&H. The two are juxtaposed to show performance during different market regimes.
michael
If you used the same scale and assumed a reasonable return on cash what would the total retun of Fed days be compared to B&H?
RE to mlb: I’m using VFINX to represent the S&P 500…
B&H over that period = 7.8% annualized.
Fed Days (excluding cash) = 3.0% annualized. You can add in a reasonable adjustment for cash from there.
There are only 8 scheduled Fed Days a year, so this strategy wouldn’t generate a huge amount in terms of total return.
michael
Michael, have you got a link for the historical Fed Days Calendar please?
Thanks
John
RE to John French: when I did my first post on the subject in 2008 I put together some data but can’t recall the exact source. For this post I just updated what happened since 2008.
In any case, with a little manual labor you could cobble the data together from these two sources:
Target Fed funds rate:
http://research.stlouisfed.org/fred2/categories/118
Scheduled & unscheduled FRB meeting dates:
http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
Hope that helps!
michael
Michael when you do these comparisons i.e. av return when Fed meets vs av. return for all days maybe you should also reference av. return for all days EXCLUDING Fed days. i.e. then we have 0.37 vs 0.01821 (by my math) instead of 0.37 vs 0.03 which serves to amplify the delta.
John