Fed Meeting Looms: Rate Hike Odds High, Market Reaction Mixed

The Federal Reserve's upcoming meeting is surrounded by unusual uncertainty, with market betting odds suggesting a greater than 60% chance of an interest rate hike. Analysis of the S&P 500 Index on Federal Reserve meeting days since 2015 indicates that while average returns are similar to typical days, positive outcomes occur less frequently, though with higher upside potential.

Historically, the S&P 500 has shown underperformance in the week following Fed meetings, averaging a minimal return with only half of instances being positive. This trend persists for up to three months, regardless of whether rates were raised or maintained. When rates were raised, the S&P 500 declined 0.54% on average in the following week, whereas maintaining rates saw a 0.23% average gain.

On the meeting days themselves, the market's reaction differs significantly based on the Fed's action. Days with rate hikes saw positive S&P 500 performance only 35% of the time, compared to 49% when rates were held steady. Interestingly, when the market did rise on rate-hike days, the gains were substantial, averaging 1.8%.

Encouragingly for investors, the American Association of Individual Investors (AAII) poll indicates widespread pessimism among its members regarding the stock market's six-month outlook. Historically, this sentiment has served as a valuable contrarian indicator on and around Fed meeting days.