Blog - Investing Notes

June 22, 2009 - Update: Stock Market Behavior Around the Mid-year Point

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. Is there a reliable pattern to daily stock market returns around mid-year? To check, we analyze the historical behavior of the S&P 500 index from five trading days before through trading days after both the last trading day of June and the last trading day before the 4th of July. Using daily closing levels of the index for 1950-2008 (59 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 last trading day of June (day 0) over the entire 1950-2008 sample period and several subperiods. Results suggest weakness before the turn of the month/quarter and strength around the turn of the month/quarter through the ensuing 4th of July holiday, although the daily returns are mostly small compared to the standard deviations of daily returns (which are around 1%).

The average daily return over this 11-day interval for the entire sample period is 0.036%, barely exceeding the 0.031% for all trading days during 1950-2008.

To compare any effect of the turn of the month/quarter to the effect of the July 4th holiday, we re-center daily returns on the last trading day before the holiday (which falls one to three trading days after the last trading day of June).

The next 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 last trading day before the 4th of July (day 0) over the entire 1950-2008 sample period and several subperiods. Results suggest a weakly positive bias around the holiday, but daily returns are again mostly small compared to the standard deviations of daily returns (which are around 1%).

The average daily return over this 11-day interval for the entire sample period is 0.054%, exceeding the 0.031% for all trading days during 1950-2008.

In summary, best guess for the U.S. stock market is a negative bias a few days before the mid-year point and a modestly positive bias around the turn of the month/quarter through the 4th of July holiday.

For related research, see Blog Synthesis: Calendar Effects and the Trading Calendar.