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A reader requested an extension of the analysis in our blog entry of 4/9/08, which tests a strategy that goes long (short) the stock market from Wal-Mart's (Alcoa's) earnings release until Alcoa's (Wal-Mart's) earnings release. The proposed follow-up employs a larger sample and a strictly calendar-based definition of earnings season, as follows: go long (short) the market at the close at the end of the sixth full week (first full week) of each calendar quarter, representing the end (beginning) of earnings season. The hypothesis is that the broad stock market does well outside of the specified earnings season and poorly during the specified earnings season. Using weekly closes of the S&P 500 index (as a proxy for the broad stock market) since the beginning of 1950, we find that...
The following chart shows average returns for the S&P 500 index during and between earnings seasons for four historical intervals:
Results show that periods between earnings seasons consistently generate greater returns on average than do earnings seasons. However, they do not support a strategy of shorting the stock market during earnings seasons, except for the small recent subsample since 2000.
If we exclude the three most recent earnings seasons (since mid-2007), the difference in average returns during and between earnings seasons since 2000 almost disappears. This change emphasizes the instability of inferences from small samples.
Since earnings seasons are on average about three weeks shorter than the time between earnings seasons, these results are somewhat misleading. What happens if we normalize based on average weekly returns during and between earnings seasons?
The next chart shows the normalized (weekly) returns for the S&P 500 index during and between earnings seasons for the same historical intervals used above, as follows:
Except for the recent short interval (since 2000), results show that there is very little difference in average stock market returns per week during and between earnings seasons. And again, if we exclude the most recent three earnings seasons (since mid-2007), the difference in average weekly returns during and between earnings seasons since 2000 almost disappears.
In summary, evidence does not support a belief that a strategy of going long (short) the broad stock market between (during) earnings seasons reliably beats, or even matches, a buy-and-hold strategy over long periods. Nor does it support a belief that the market tends to be relatively weak during earnings seasons over the long run.
For related research, see Blog Synthesis: Calendar Effects.
