It is widely known that each time the Fed gives an announcement, the whole investing world is watching. So, one may wonder if those events can ruin their investments.
Recently in this blog, we have studied a set of variables which might move the market. From this post one can extract that Fed statements are a powerful variable that moves the world economy.
Why not to take advantage of it in an investment strategy?
Along this post, you will find a short experiment of the effects that Fed press conferences have in the S&P500 index value.
For this experiment, we use returns of the S&P500 and the Fed conferences calendar from 2017-01-01 until 2021-10-25. This information is taken from the following link.
In the next figure, one can see the evolution of the cumulative returns of the S&P500 and the days in which the Fed gave a press conference.
By itself this data doesn’t tell us much, but in the next section, we will check the effect of Fed meetings in the market.
To check if Fed announcements have a negative impact on the S&P500, the next strategy is followed:
- Our portfolio is invested (100%) in the S&P500 if there are not Fed press conferences expected to happen in the next 2 days.
- If there is a press conference the next day, the current day or the previous day, our portfolio is not invested (0%) in the S&P500.
With this simple strategy, we can infer which is the effect of Fed press conferences in the value of the index.
In the following figure you can see the evolution of our Portfolio compared to the S&P500. It outperforms the index, although March 2020 seems to be the source of such dispersion.
To check the effect of Fed press conferences during March 2020, in the following figure you can see what would be the evolution of our strategy if those conferences were removed from the data.
As you can see, our portfolio still outperforms the index especially for not being invested during the following announcements:
- 2018: 21st of March, 8th of November and 19th of December
- 2019: 31st of July
- 2020: 10th of June
- 2021: 27th of January and 17th of March
With all this being said, it’s worth noting that:
Correlation doesn’t imply causation
So, even though figures show a clear correlation between conferences and negative S&P500 evolution, it doesn’t mean that Fed press conferences are always the cause of a negative S&P500 evolution.
Looking at the figures, anyone can think that the Fed moves the market. Once you know, you can take advantage of it by:
- Decreasing the risk of your portfolio before any future announcement.
- Increasing the risk of your portfolio if the announcement is positive.
- During announcements, using assets with negative correlation with the S&P500 as a safe haven.
The next Fed press conference will be on the 3rd of November of 2021. Do you believe in correlations? If so, will you adjust your S&P500 investments?
Thanks for reading!