How to Trade the Fed Meeting

You may want to steer clear of stocks the Monday before the meeting

Senior Quantitative Analyst
Oct 23, 2019 at 6:30 AM
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The Federal Open Market Committee (FOMC) will meet next week and is expected to lower interest rates next Wednesday, Oct. 30, just as it's done the last two meetings. Going back to 2015, Fed weeks have tended to be bearish for the stock market. The table below shows the S&P 500 Index (SPX) has averaged a loss during these weeks, with exactly half positive and half negative.

Rate cuts haven't seemed to help Wall Street during Fed weeks, either. The week of the last two meetings yielded losses of 0.5% and 1.6%, respectively, for the SPX. This week, I’ll break down market returns around these meetings to see what we can expect from stocks -- and other assets -- over the next couple of weeks.

S&P During Fed Weeks vs. Anytime

You might expect the Fed meeting to be a catalyst for a big move in stocks, but based on Fed weeks since 2015, you'd be wrong. The standard deviation of returns during Fed weeks is less than what has been typical for the S&P since 2015.

Also, the average positive and negative have been less in magnitude compared to other weeks. This doesn’t, however, mean the meeting won’t be a catalyst; the potential is there. It’s just that the FOMC hasn’t surprised traders with anything yet, which is probably their goal.

IotW1 - SPX Fed weeks vs anytime

Fed Week By Day

Here, I summarize S&P 500 returns around Fed announcement days. The second table shows the typical S&P 500 return for each day of the week. All but one Fed day was a Wednesday, so the corresponding columns are comparable.

Mondays during Fed weeks have been awful. Only 34% have been positive, with the S&P 500 losing an average of 0.20%. Tuesdays have been bounce-back days with strong returns. Monday and Tuesday have also generated lower-than-usual volatility. Traders might be reluctant to make any bold moves until the Fed acts.

Surprisingly, Fed days themselves also have lower volatility than normal. In fact, Fed-day returns look almost like a normal Wednesday, except they're slightly more bearish.

Stocks tend to struggle late in Fed weeks. Thursdays average a loss of 0.13%, with only half of the returns positive. Friday is worse, averaging a loss of 0.19% with just 42% of them positive.

IotW2 - SPX fed week by day

Week Before vs. Week After Fed Decisions

If you’re looking to play the market before and after the meeting, the table below suggests you buy stocks now and sell at the close on Tuesday. The table summarizes the S&P 500 the week before the Fed meeting (from Tuesday's close to Tuesday's close) and the week after the meeting (Wednesday's close to Wednesday's close). Note that the numbers do not include the actual day that the Fed meeting wraps up.

The market has been bullish in the week leading up to the meeting, and bearish the week after. Furthermore, there has been less volatility in the returns in the week leading up to the meeting. This makes sense, since traders often sit on their hands leading up to an event. The numbers, however, suggest that may not be wise.

IotW3 - SPX before and after fed weeks

Other Relevant Assets Before & After Fed Meetings

Fed actions impact every asset, not just stocks. Below, I show how other major assets have performed in the week before and after a meeting, and on the day of the FOMC decision.

This first table shows how bonds have fared around Fed days. Looking at the iShares 20+ Year Treasury Bond ETF (TLT), the bond exchange-traded fund (ETF) has tended to underperform in the week before the meeting, and very slightly outperform in the week after. So, the opposite of stocks, which would make sense. Also, TLT has outperformed on the day of the Fed decision going back to 2015.

IotW4 - TLT Fed weeks

This table shows returns of the Invesco DB U.S. Dollar Index Bullish Fund (UUP), which is a fund that tracks the U.S. dollar. Since 2015, the dollar has been weak in the seven days before the Fed decision. The Fed day itself has also been bearish for the dollar. Based on these numbers, the best time to go long the dollar is after the market closes on the day of the meeting.

IotW5 - UUP fed weeks

Finally, here’s a look at how gold has performed around Fed meetings. SPDR Gold Shares (GLD), the gold ETF, has typically underperformed in the week before and after the meeting. Fed day itself, however, has been bullish for the asset.

IotW6 GLD fed weeks

 

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