What Happens the Day After Fed Meeting?
Wednesday, December 16, 2009 at 10:11AM Today's FOMC statement was the seventh time this year that policymakers opted to leave the Fed Funds Target and Discount Rates unchanged at a range of 0% - 0.25%. It has now been exactly one year since rates were lowered to the current level. In a B.I.G. Tips report we emailed out to subscribers yesterday, we noted that on recent FOMC days, the S&P 500 tends to open the day on a positive note, but then weakens following the announcement. While the day isn't over yet, so far the S&P 500 has been following the historical script pretty closely. So what happens the day after FOMC days?
While additional factors come into play the further we go out from the Fed's announcement, we wondered if there are any notable trends in the market after investors have some time to digest the Fed news and sleep on it. In the table below, we have highlighted each Fed day since the FOMC lowered rates to their current levels. On the day the FOMC lowered rates to their current level (12/16/08) as well as the next two announcement days (1/28 & 3/19), the S&P 500 rallied in the last two hours of the day. Since then, however, the S&P 500 has sold off in the last two hours of the day.
Based on this trend, we looked at the S&P 500's performance the day after the market rallied in reaction to the Fed and its performance the day after the market sold off. The day after the market rallies, the next day has seen declines all three times for an average decline of 1.86%. However, on the five days following a post Fed sell off, the market has averaged a gain of 0.74% with positive returns three out of five times. So in both cases it appears as though after mulling it over for a while, investors look at the initial reaction and view it as an over-reaction.
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