End-of-Quarter Effect

Does the U.S. stock market offer a predictable pattern of returns around the ends of calendar quarters? Do funds deploy cash to bid stocks up at quarter ends to boost portfolio values at the end of reporting periods (with subsequent reversals)? Or, do they sell stocks to raise cash for fund redemptions? Is the end-of-quarter effect the same as the turn-of-the-month effect? To investigate, we examine average daily stock market returns from 10 trading days before to 10 trading days after the ends of calendar quarters. We also compare these returns to those for turns of calendar months. Using daily closes for the S&P 500 Index for January 1950 through March 2011, we find that:

The following chart shows the average daily returns for the S&P 500 index, with one standard deviation variability ranges, from 10 trading days before to 10 trading days after ends of all calendar quarters since 1950 (244 quarters). Day -1 is the last trading day of the quarter. The average daily return for all days in the sample is about 0.03%. The chart suggests systematic strength the first few days after ends of quarters bracketed by weakness or doldrums before and after.

As usual, differences between average daily returns and the average daily return for the entire sample are small compared to daily variabilities.

Does a recent subsample confirm an end-of-quarter pattern?

The next chart compares the average daily returns for the S&P 500 Index from 10 trading days before to 10 trading days after ends of all calendar quarters since 1950 and since 1990 (84 quarters). Note that the scale differs from that above. Again, day -1 is the last day of the quarter. Similarities support some belief in the reliability/persistence of an end-of-quarter pattern, but the similarities are imperfect. For the recent subperiod, beginning-of-quarter strength concentrates in the first trading day.

Are results different for different calendar quarters?

The next two charts show the average daily returns for the S&P 500 Index from 10 trading days before to 10 trading days after ends of all four calendar quarters since 1950 (62 observations for each quarter) and since 1990 (21 observations for each quarter). Again, day -1 is the last day of the quarter.

For the entire sample period, some consistency in results across quarters offers modest support for belief in anomalous strength at the beginnings of quarters. Q4 (end of the year) is least like the others, showing earlier positive returns and weaker subsequent returns.

For the recent subsample, results are so noisy that it is difficult to discern any pattern.

Is the overall end-of-quarter pattern simply a turn-of-the-month (TOTM) effect, or vice versa?

The final chart compares the average daily returns for the S&P 500 Index from five trading days before to five trading days after ends of quarters to those for TOTMs, with (733 months) and without (489 months) ends of quarters. Day -1 is the last trading day of the quarter/month. Evidence suggests that ends of quarters may delay the TOTM effect by one or two days and sharpen it.

In summary, evidence suggests some systematic strength the first few days after ends of quarters bracketed by weakness or doldrums before and after, with effects small compared to daily return variability. The fourth quarter pattern is the strongest and most distinctive.

Cautions regarding these findings include:

• As noted, any daily anomaly present is small compared to daily variability, so reliable exploitation requires persistent implementation.
• To the extent that the S&P 500 Index daily return distribution is wild, the mean and standard deviation are not reliable predictors of future return behavior.
• The market may adapt to anomalies after publication.

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