What Next Week's Fed Meeting Could Mean for Stocks

Breaking down S&P returns by day during Fed meeting weeks

Senior Quantitative Analyst
Jun 6, 2018 at 7:00 AM
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There is a heightened chance of stock volatility next week. The June Federal Open Market Committee (FOMC) meeting will wrap up on Wednesday, June 13, with Chairman Jerome Powell holding an afternoon press conference. The Fed is expected to raise rates by 25 basis points, which would be the second rate increase in 2018, and the seventh since the end of 2015.

In the table below, you can see that Fed weeks have tended to be bearish for stocks. The S&P 500 Index (SPX) averages a loss during these weeks, with barely more than half of the returns positive. In this article, I will break down these weeks even further to see what can be expected in the days before and after the meeting. I will also look at market returns during the specific weeks that rates were raised previously.

IotW Chart 1 SPX Since 2015

Fed Days of the Week

In the first chart, I summarize S&P 500 returns around Fed days (with the knowledge that all but one Fed day was on a Wednesday). In the second, I show the typical daily S&P returns during a Fed week since 2015, as well as the typical returns for each weekday.

Mondays ("2 days prior") during Fed weeks have been awful. Less than 30% of them have been positive, with the S&P 500 losing an average of 0.18%, while Tuesdays ("Day Before") have been bounce-back days with strong returns. Monday and Tuesday also have lower-than-usual volatility. Traders might be reluctant to make any bold moves until the Fed moves are clear.

Surprisingly, Fed days themselves also have lower volatility than normal. In fact, Fed day returns look almost like a normal Wednesday. Looking at stock returns, Fed days seem like a non-event.

Stocks tend to struggle late in Fed weeks. Thursdays ("Day After") average a loss of 0.19%, with only 44% of the returns positive. Friday ("2 Days After") is better, but not by much. The last day of a Fed week has been negative more times than positive while averaging a slight loss.

IotW SPX Chart 2

Rate Hikes vs. Standing Pat

The Fed looks almost certain to raise rates next week. Below, I compare Fed weekly returns since 2015, depending on whether rates get raised or not. When rates have been raised, the weekly returns are more bearish than other Fed weeks, with more volatility.

IotW Chart 3

Finally, I have the daily returns for the individual weeks in which the Fed raised rates. The March Fed week was a disaster, with the S&P 500 falling more than 6%. Stocks also had back-to-back 2% losses to close out that week. Essentially, since 2015, any week that the Fed raised rates has been tough for stocks -- especially late in the week after the Fed makes its move. Hopefully, this will play out differently at the upcoming meeting.

IotW Chart 4

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