Without the Fed, the S&P Would Be 600

Sort of...

Traders may not have the data, but they surely know that days that contain Federal Reserve meetings and announcements tend to carry excess volatility. Two economists at the Fed, David Lucca and Emanuel Moench, have just proven the thesis correct.

The Fed economists wanted to look at S&P returns without days that the Fed meets, and the results are shocking. By looking at cumulative returns from the day before a meeting through the day after, the economists were able to prove that volatility on these days is higher than normal. As the chart above shows, cumulative returns and the distribution of returns are both higher on these days. Thus, trading around the Fed is more volatile.

Further, looking at the chart below, it can be seen that, without these sets of days, the S&P 500 would not be at 1300, would not be at 1000, and would not even be at the March, 2009 lows of 666. Rather, the S&P 500 would be a mere 600, more than 50 percent below current levels.

Prior to 1997, there was no clear divergence between returns on Fed days and non-Fed days. However, in the last decade or so, these returns have diverged, with the S&P 500 performing much better with Fed days included.

For traders, this should merely confirm suspicions that already existed. Many know that markets are volatile around Fed meetings, and the data is simply a way for them to verify these suspicions.