Forget Jim Cramer. Here's a real hot stock tip. (Don't worry, I'll tell you more!) Buy equities right before the Federal Reserve announces its decisions. Then sell a day later.
That's it. That sound you hear is the eTrade baby hitting a Staples easy button.
Since 1994, something strange has happened. More than 80 percent of the equity premium -- which measures how much stocks outperform bonds -- has been earned in the day before the Federal Open Market Committee (FOMC) makes its policy decisions public. The FOMC does that eight times a year.
The chart below from the New York Fed's Liberty Street blog shows the difference between the overall market (blue), and the market minus pre-FOMC days (red).
What the heck is going on? It has to be the market betting on or hedging against a so-called Greenspan/Bernanke Put. A put is just a contract that protects the buyer from downside risk. In other words, markets were anticipating that the Fed would protect them from any bad news by easing policy. Maybe they were hoping it would happen. Maybe they weren't -- but closed short positions out of fear it would. It doesn't matter which. The result is the same. Stocks going up.
This trend isn't going away. It's getting more pronounced. Up until the tech bubble burst, there wasn't much difference between the overall market and the market minus pre-FOMC days. Then things changed. They changed even more after Lehman failed. Here's another way of thinking about how much it changed. Without pre-FOMC days, the S&P 500 is up roughly 50 percent since 1994; with pre-FOMC days, the S&P 500 is up roughly 200 percent since 1994. Again, we're talking about eight days out of the year quadrupling returns.
This is what a market that can't survive without the Fed looks like. It's certainly not good that the economy needs to be on life-support -- but it's better to be on life-support than to be dead.
So, if you're wondering when the next FOMC meeting is, here's the schedule for the rest of the year. You're welcome.
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