05. Feb 2018
As you know, investment decisions can be optimized with the help of statistics. One possibility to do so is offered by the FOMC meeting strategy.
A study published by the Federal Reserve Bank of New York in 2011 examined the effect of FOMC meetings on stock prices.
The study concluded that these meetings have a substantial impact on stock prices – and contrary to what most investors would tend to expect, before rather than after the committee announces its monetary policy decision.
Study shows: time period shortly before the FOMC announcement most important for stock prices!
The impact is so strong, that it would have been possible to achieve almost the entire cumulative return of the S&P 500 Index since 1998 if one had invested exclusively during the days when FOMC meetings were held.
The chart below illustrates the situation. The blue line shows the trend in the S&P 500 Index since 1998, indexed to 100. The green line depicts the cumulative return of investing exclusively on FOMC meeting days, the red line shows the cumulative return of investing during all remaining trading days.
S&P 500 Index, FOMC meetings (green), other trading days (red), 1998 to 2017
A mere 16 trading days per year generated almost the entire return of the index! Source: Seasonax
As you can see above, one could have made a profit almost equal to a “buy & hold” return, while taking substantially less risk by investing exclusively during FOMC meetings – which take up a mere 16 trading days per year.
Conversely, the red line is lagging behind by a wide margin. That means that just 6.3 percent of all trading days generated considerably larger returns than all 93.7 percent of the remaining trading days combined!
Hence it definitely made a lot more sense to buy stocks in the days leading up to FOMC meetings than buying them thereafter. Conversely, it was possible to optimize the timing of sales after the release of policy statements as well.
As these data illustrate, event studies definitely provide information that is useful for conservative investors as well – they are not just of interest to short term traders.
Right now, taking advantage of the FOMC meeting strategy is particularly promising!
Irrespective of this, the FOMC meeting strategy could actually be particularly interesting at the current juncture. Here is why:
Stock markets have been in unbroken uptrend for the past nine years. It seems doubtful that they will continue to rally without problems for another nine years; it seems rather more likely that a price decline – possibly a large one – will eventually take hold.
The FOMC meeting strategy tends to generate outperformance especially in times of market weakness. And perhaps a time when the market will weaken is indeed what lies ahead. In that case applying the FOMC meeting strategy and other event strategies suggested by the Seasonax App will improve your returns. This approach certainly offers a viable alternative to simply selling one's entire equity portfolio. Take advantage of the days when the FOMC meets!