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Does the Labor Day holiday, marking the end of summer vacations, signal any unusual return effects by refocusing U.S. stock investors on the market? By its definition, this holiday brings with it any effects from three-day weekends and the turn of the month. To investigate returns around Labor Day, we analyze the historical behavior of the S&P 500 index during the three trading days before and the three trading days after the holiday. Using daily closing levels for 1950-2006 (57 events), we find that...
The following chart shows the average daily S&P 500 index returns for the three trading days before (LD-3 to LD-1) and the three trading days after (LD+1 to LD+3) Labor Day for 1950-2006, with one standard deviation error bars. The mean daily return for all 14,504 trading days in the sample is 0.03%. Results on average suggest strength on the Friday before Labor Day and no abnormal returns the other five trading days (standard deviations very large compared to the differences from the mean for all days). As usual for daily data, noise generally dominates signal.
To check the stability of the pre-holiday peak, we next look at a "modern" subsample.
The next chart compares the average daily returns for the three trading days before and after Labor Day in the entire sample to those occurring since the beginning of 1990 (17 events). This chart has no error bars 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. All days except the day after Labor Day are more negative after 1990.
One tendency that is notably consistent for both the entire sample and the subsample is the relatively high volatility the day after Labor Day.
Some of the differences between the overall sample and the subsample are statistical noise. Could the shift in peaks relate to the turn- of-the-month effect?
A closer look at the days of the month on which Labor Day falls shows that the turn of the month comes before the holiday 42% (41%) of the time for 1950-2006 (1990-2006). Such a small difference is not explanatory. The usual suspect is noise within a small subsample.
In summary, best guess is that any anomalous U.S. stock market strength around Labor Day will come one trading day before or one trading day after the holiday, but noise dominates.
For related research, see Blog Synthesis: Calendar Effects and the Trading Calendar (especially the monthly profile for September).
