Stock Market Behavior Around Mid-year and 4th of July
Posted in Calendar Effects
June 21, 2010
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 and the 4th of July? To check, we analyze the historical behavior of the S&P 500 Index from five trading days before through trading days after both the end of June and the the 4th of July. Using daily closing levels of the index for 1950-2009 (60 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 end of June over the entire sample period, with one standard deviation variability ranges. Results suggest some anomalous but choppy strength around the mid-year point.
To check the reliability of this pattern, we look at two subsamples.
The next chart compares the 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 end of June for several subsamples. This chart has no variability ranges and uses a finer vertical scale than the preceding one. Results provide some support for belief in the pattern noted above, but also a hint that the market is adapting to the pattern by shifting it to the left.
To compare any effect of mid-year to the effect of the July 4th holiday, we re-center daily returns on the holiday (which falls one to three trading days after mid-year).
The final 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 4th of July over the entire 1950-2009 sample period and several subperiods. Inconsistencies in results across subperiods undermine any belief in anomalous market behavior around the holiday.
As above, average daily returns are mostly small compared to the standard deviations of daily returns.
In summary, best guess for the U.S. stock market is a positive bias focused at the mid-year point and no reliable bias around the 4th of July holiday.
