Double your performance using the FOMC?


8:30 p.m. ▪
11
min reading ▪ by
Thomas A.

The FOMC is a major financial news event and its impact on stock market performance is far from negligible. Eight times a year, this meeting moves the financial markets, starting with the S&P 500 and all correlated assets such as bitcoin (BTC). In this article, we will focus on the influence of the FOMC on market performance in the days preceding and following the committee’s announcement. A major conclusion of this article is that the FOMC does indeed cause significant differences in performance.

What is the FOMC and what is its point?

The FOMC, or Federal Open Market Committee, is the key decision-making body of the FED. He is responsible for define the country’s monetary policy. The FOMC meets regularly to assess the state of the economy and decide what actions to take to achieve the FED’s goals of economic growth, price stability, and full employment. Among its main responsibilities are the setting of key interest rates, the implementation of monetary policy measures such as the purchase or sale of securities on the market or the communication of the future orientations of monetary policy. In this context, why grant such influence to the FOMC?

S&P 500 (red curve) and simple model based on money supply (M2, black curve). Source: How does the money supply influence stock market indices? – Thomas Andrieu (andrieuthomas.com)

The chart above shows the S&P 500 with the adjusted money supply level (M2 for the United States). This chart shows the close relationship between money supply and major stock market indices. In this context, it is obvious that credit conditions (the evolution of the central bank’s balance sheet and the key rate) influence the level of the money supply, and ultimately the level of the S&P 500. Therefore, before the central bank’s monetary announcement, the uncertainty weighing on the “fundamental level” of stock indices is larger. Investors are then encouraged to stay away from the market until the bank’s announcement is made.

In other words, uncertainty about central bank behavior adds risk and reduces performance. This market anomaly is thus reflected in the facts.

A phenomenon known to traders

Many traders therefore prefer to avoid the FOMC because the central bank’s announcement generates volatility and movements that are potentially very violent and too risky. In theory, the market is therefore likely to experience a reduction in performance before the FOMC, before an easing of risk and an increase in performance following the FOMC.

FOMC and outperformance: an old relationship?

In 2014, Cieslak, Morse and Vissing-Jorgensen published a study on the link between the FOMC and stock market performance. Thus, they showed that almost all market performance was concentrated in the even weeks following the FOMC.

“The bi-weekly trend in stock returns over the FOMC cycle is a novel finding and appears surprisingly robust. Average excess returns are statistically significantly higher in even weeks than in odd weeks during the FOMC cycle. Furthermore, this trend is robust across three sub-periods of this 20-year sample and is also present in stock markets outside the United States.

cieslak_morse_vissing.pdf (bis.org)

Over nearly 20 years (1994-2014), investing in even weeks following the FOMC rather than in other weeks has shown clear market outperformance. By defining a “B strategy” as a strategy where the investor positions only on even weeks after the FOMC, the study reaches the following conclusion:

Strategy B would have a Sharpe ratio of 0.8, twice that of Strategy A. This is achieved by adding about 3 percentage points of average annual excess returns and reducing the standard deviation of annual excess returns by about a third. Below the results for strategy B, we show the results for holding stocks in a given even week only and staying out of the market in other weeks. […] This shows that weeks 0, 2 and 4 each contribute substantially to the overall performance of strategy Bwhile week 6 is less important because it represents fewer data points for that week.

cieslak_morse_vissing.pdf (bis.org)

In particular, the average performance cycle after the FOMC between 1994 and 2014 can be summarized as follows (noting 0 on the day of the FOMC). Ultimately, the FOMC would generally result in an increase in market performance in even weeks in the weeks that follow, as well as a reduction in the volatility of certain returns.

Average performance adjusted around the FOMC (FOMC = date 0). Source: cieslak_morse_vissing.pdf (bis.org)

Is the S&P 500 still sensitive to the FOMC?

To validate the theoretical intuition, we resorted to a historical study. First, we gathered all FOMC dates from 2015 to 2024. Next, we compared the average performance of the S&P 500 before and after the FOMC. The graph below shows the average performance of the S&P 500 around the different FOMCs observed since 2015. The results obtained are quite close to those obtained by Cieslak, Morse and Vissing-Jorgensen in 2014. Despite everything, a time lag seems to have appeared…

Average performance of the S&P 500 before and after the FOMC. Period studied: 2015-2024. Source: andrieuthomas.com

We thus notice that before the FOMC, stock market performances were rather stable and slightly upward. On the other hand, once the FOMC has passed, stock market performances appear to react in waves. A first wave of bullish performance generally emerges between the FOMC announcement and the following 5 to 7 days. According to the study from 1994 to 2014, we observe on average an increase in performance between the 5th and 15th day after the FOMC. Then, a second wave of bullish performance seems to appear between the 10th and 20th/25th day after the FOMC. In the 1994 study, this cycle was also observable. Overall, we still see a positive bias from the FOMC on stock market performance up to 20 days after the latter.

Taking advantage of the FOMC: an evolution of strategies?

We have therefore shown that the FOMC / performance relationship seems to be evolving. Thus, bullish performances occur more quickly just after the announcement. On the other hand, the second wave of bullish performance seems to have been preserved. The weeks favorable for bullish performances after the FOMC would then be weeks 1, the first half of 2, the second half of 3, week 4, etc… The graph above shows the performances obtained over the different even weeks and odd numbers after the FOMC. We see that the change in temporality compared to 1994-2014 leads to a change in optimal strategies. Indeed, an investment in odd weeks (specifically weeks 1 and 3) would have resulted in a performance as high as the S&P 500 itself! This new strategy therefore remains optimal despite everything. By taking into account the changes mentioned in a more precise manner (to the day), it is likely that the strategy would continue to outperform the market.

Is bitcoin also boosted by the FOMC?

The relationship between FOMC and bullish performance looks quite different on bitcoin (BTC). Indeed, we note that bitcoin would tend to experience a peak in performance around the FOMC. Then it would tend to drop the first week. A bullish recovery would nevertheless be notable until the middle of the third week. Additionally, the 10 days before the FOMC would also be quite positive. It is therefore less obvious to distinguish a real FOMC effect on bitcoin. Despite everything, we see regular phenomena emerging. The performance cycles around the FOMC would therefore last close to 25 days. The bullish phases would therefore be close to 10 to 12 days.

Average performance of bitcoin before and after the FOMC. Period studied: 2015-2024. Source: andrieuthomas.com

In conclusion

Ultimately, we saw that the FOMC significantly influenced stock market performance. Between 1994 and 2014, investing in even weeks after the FOMC would have ensured performances twice those of the market. This simple rule nevertheless seems to have become more complex (shift in temporality). A more rigorous study of periods of outperformance after the FOMC would thus make it possible to determine exactly the most optimal strategy. Furthermore, this relationship seems to apply differently to bitcoin. However, we see that the FOMC clearly influences the price of bitcoin.

Finally, we will recall that this monetary phenomenon is essentially linked to the dependence of stock market indices on the money supply. In the absence of a central bank announcement, markets objectively add risk to their strategy, which reduces market performance.

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Thomas A. avatarThomas A. avatar

Thomas A.

Author of several books, economic and financial editor on several sites, for many years I have developed a real passion for the analysis and study of markets and the economy.

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