S&P 500 Reacts Differently to Fed Hikes vs Holds

Market participants face elevated uncertainty ahead of the Federal Reserve’s upcoming interest rate decision, with betting odds indicating a 60% probability of a rate hike. Historical analysis of the S&P 500 Index (SPX) from 2015 to the present reveals that the index’s performance on Fed meeting days mirrors that of a typical trading day in terms of average returns. However, the frequency of positive returns is lower on Fed days, while the magnitude of gains when the market rises is significantly higher compared to non-event days.

In the week following a Federal Reserve meeting, the S&P 500 has consistently underperformed relative to its baseline. The index averages a near-zero return during this period, with only 50% of weekly outcomes being positive. This contrasts sharply with the standard weekly performance, where the SPX averages a 0.25% gain and posts positive returns in 61% of instances. For timeframes extending beyond one week, post-meeting returns converge back to normal market averages, suggesting that the immediate post-decision volatility is transient.

Rate Hikes Trigger Short-Term Declines

The specific outcome of the Fed’s decision dictates the subsequent market trajectory. According to data cited by GN stocks/sp500, the S&P 500 declined by an average of 0.54% in the week following a rate hike, with only 40% of those periods resulting in positive returns. Conversely, when the Fed maintained rates, the index averaged a 0.23% gain in the following week, with 54% of returns positive. Although the index begins to recover after the first week post-hike, underperformance persists through the third month following the decision.

On the day of the meeting itself, the probability of a positive return is lower when the Fed raises rates. The S&P 500 was positive on just 35% of days involving a rate hike, compared to 49% of days when rates were held steady. Nevertheless, when the index does rise on a rate-hike day, the average gain reaches 1.8%, a figure that offsets the higher frequency of losses to produce an overall average daily return of 0.10%, identical to the average seen on hold days.

Contrarian Signal From Investor Sentiment

Sentiment indicators offer a counterpoint to price action. The American Association of Individual Investors (AAII) poll has shown increased pessimism among its members, with the number of bears exceeding bulls for the past four weeks. Historically, the AAII poll serves as a reliable contrarian indicator around Federal Reserve meeting days and the subsequent weeks. This sustained bearish positioning may suggest that market sentiment is already pricing in potential downside, potentially setting the stage for a divergence between investor expectations and actual index performance.