Stock Market Behavior Around Mid-year and 4th of July
Posted in Calendar Effects
June 23, 2011
The middle of the year might be a time for funds to dress their windows and investors to review and revise portfolios. The 4th of July celebration might engender optimism among U.S. investors. Are there any reliable patterns to daily stock market returns around mid-year and the 4th of July? To check, we analyze the historical behavior of the S&P 500 Index from five trading days before through trading days after both the end of June and the the 4th of July. Using daily closing levels of the index for 1950-2010 (61 years), we find that:
The following chart shows average daily S&P 500 Index returns from five trading days before (days -5 to -1) to five trading days after (days 1 to 5) the end of June over the entire sample period, with one standard deviation variability ranges. Results perhaps suggest some choppy strength just after the mid-year point, but variability is large compared to any anomalies.
To check the reliability of this pattern, we look at subsamples.
The next chart compares the average daily S&P 500 Index returns from five trading days before (days -5 to -1) to five trading days after (days 1 to 5) the end of June for several subsamples. This chart has no variability ranges and uses a finer vertical scale than the preceding one. Inconsistencies across subperiods, except for the first day after mid-year, undermine belief in a reliable pattern.
To compare any effect of mid-year to the effect of the July 4th holiday, we re-center daily returns on the holiday (which falls one to three trading days after mid-year).
The final chart shows average daily S&P 500 Index returns from five trading days before (days -5 to -1) to five trading days after (days 1 to 5) the 4th of July over the entire sample period and several subperiods. Inconsistencies in results across subperiods undermine any belief in anomalous market behavior around the holiday.
In summary, best guess for the U.S. stock market is a small positive bias focused at the mid-year point and no reliable bias around the 4th of July holiday.
Cautions regarding the finding include:
- As noted, any return anomaly is small compared to return variability, so experience by year varies widely.
- To the extent that the distribution of daily S&P 500 Index returns is wild, interpretation of the average return and standard deviation of returns breaks down.
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