Stock Returns Around Labor Day

Does the Labor Day holiday, marking the end of summer vacations, signal any unusual return effects by refocusing U.S. stock investors on managing their portfolios? By its definition, this holiday brings with it any effects from three-day weekends and the turn of the month. To investigate the possibility of short-term effects on stock market returns around Labor Day, we analyze the historical behavior of the stock market during the three trading days before and the three trading days after the holiday. Using daily closing levels of the S&P 500 Index for 1950-2010 (61 observations), we find that:

The following chart shows the S&P 500 Index average daily returns over the three trading days before (LD-3 to LD-1) and the three trading days after (LD+1 to LD+3) Labor Day over the entire sample period, with one standard deviation variability ranges. The average daily return for all trading days in the sample is 0.03%. Results suggest some strength on the Friday before Labor Day and no notably abnormal returns the other five trading days. Volatility is relatively high the day after Labor Day.

As usual for daily data, noise generally dominates signal (standard deviations are large compared to any indicated abnormalities in average daily returns).

To check the stability of the pre-holiday peak, we next look at a “modern” subsample.

The next chart compares S&P 500 Index average daily returns over the three trading days before and after Labor Day in the entire sample to those for a 1990-2010 subsample (21 observations). This chart shows no variability ranges and uses a finer vertical scale than the preceding chart. There are noticeable differences, with the peak shifted from the day before to the day after Labor Day.

Volatility is notably high the day after Labor Day for both the entire sample and the subsample.

Some of the differences between the overall sample and the subsample are noise. Could the shift in peaks relate to the turn- of-the-month effect (whether Labor day comes early or late within its one-week window)?

The final chart compares S&P 500 Index average daily returns over the three trading days before and after Labor Day for the 17 observations when Labor Day occurs earliest (9/1/ or 9/2) and the 18 observations when Labor Day occurs latest (9/6 or 9/7) over the entire sample period. The patterns are similar. It appears that the turn-of-the-month effect does not substantially influence results.

In summary, best guess is that any anomalous U.S. stock market behavior around Labor Day is strength one trading day before or one trading day after the holiday, with high volatility on the latter day, but noise generally dominates.

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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