One market wisdom says – „Don’t fight the FED“, and academic research agrees with it. Academic studies show that the S&P 500 index average daily returns during Federal Open Market Committee meetings since 1980 (since FED started to be less secretive and more open about its plans and actions) are outstanding – more than five times greater than returns during other average days on the market. It means that more than 16% of average yearly returns for the equity index is realized during very few days.
Therefore it handsomely pays to be long during these few days. A simple market timing strategy that exploits this anomaly could be created. As it is only a few days in a year, this strategy could be easily leveraged to obtain higher returns.
FOMC meetings are mostly positive for the stock market. The FED’s purpose is to address banking panics, maintain the stability of the financial system, contain systemic risk in financial markets, and strengthen economic growth. Therefore it is highly unlikely that FOMC meetings’ conclusions would be highly negative for stocks. This is the main cause of a positive drift.
per annum, return calculated for investor which is long stocks (average daily return 0.2734% – table 1) during FOMC meeting and invested in cash for remaining days (4% return on cash is expected)
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The investor is invested in stocks during FOMC meetings (going long S&P 500 ETF, fund, future, or CFD on a close one day before the meeting and closing position on close after the meeting). Otherwise, he is invested in cash during the remaining days. The strategy has very low exposure to the stock market (8 days during the average year); therefore, it can be very easily leveraged to gain very significant returns.
No - The strategy is timing equity market but invests long-only into equity market factor (even that only for a short period of time); therefore is not suitable as a hedge/diversification during market/economic crises.
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