By David Blitzer, Chairman of the Index Committee
A recent academic paper (link here, full citation below) demonstrates that day-to-day stock market returns follow a regular bi-weekly cycle tied to the schedule of FOMC meetings, the Fed's policy unit. A rolling five day return calculated as the excess return of stocks over T-bills peaks on the day the FOMC meets and then every other week quite consistently thereafter. The pattern goes back to 1994 when the FOMC began regular announcements of its policy adjustments. With a series of analyses, the paper argues that the return pattern is statistically significant and would be likely to generate economically significant returns. The analysis builds on an earlier paper that found strong positive equity returns in the 24 hours just before the FOMC releases its meeting announcement. Since the analysis was based on all stocks traded in the U.S. using data from Ken French's web site, implementing a strategy based on the results might require a lot of trading. However, similar results might be possible using ETFs or index futures.
The puzzle is what is generating such strong returns before the FOMC announcements? If the announcement contained important news about monetary policy and the economy, one would expect the market move to come immediately after the announcement. The research shows that internal meetings at the Fed follow a regular two week cyclical pattern tied to the FOMC meeting schedule. Moreover, these internal meetings include bi-weekly discussions of the discount rates set by regional Fed banks and regular economic analyses by the Fed staff. Could information from these meeting be seeping into the markets? The timing of other economic data, such as weekly and monthly data releases can't explain the pattern of stock market returns. Moreover, the Fed through its own analyses and data it gathers to support its policy making has a wealth of economic information. One likely source is comments made to journalists with the intention of influencing the markets. The research gives examples of news articles the appear from time to time on the front page of the Wall Street Journal or New York Times citing "Fed insiders" or "staff forecast" or suggesting that "Fed officials would welcome…"
Paper: "StockReturns and the FOMC Cycle" by Anna Cieslak, Adair Morse and Annette Vissing-Jorgenson, June 25, 2014. Second related paper: "The Pre-FOMC Announcement Drift" by David O. Lucca and Emanuel Moench, July 2013
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