Calendar Effects

A subscriber requested evaluation of three retirement investment alternatives, assuming a constant increment invested at the end of each month, as follows:

1. 50-50: allocate each increment via fixed percentages to stocks and bonds (for comparability, we use 50% to each).
2. Seasonal 1: during April through September (October through March), allocate 100% of each increment to stocks (bonds).
3. Seasonal 2: during April through September (October through March), allocate 100% of each increment to bonds (stocks).

The hypothesis is that seasonal variation in asset class allocations could improve overall long-term investment performance. We conduct a short-term test using SPDR S&P 500 ETF Trust (SPY) as a proxy for stocks and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) as a proxy for bonds. We then conduct a long-term test using Vanguard 500 Index Fund Investor Shares (VFINX) as a proxy for stocks and Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX) as a proxy for bonds. Based on the setup, we focus on terminal value as the essential performance metric. Using total (dividend-adjusted) returns for SPY and LQD since July 2002 and for VFINX and VWESX since January 1980, all through December 2020, we find that: Keep Reading

Do investors swing toward optimism around U.S. presidential inauguration days, focusing on future opportunities? Or, does the day remind investors of political uncertainty and conflict? To investigate, we analyze daily returns of the S&P 500 Index around inauguration day. We consider subsamples of no party change and party change. Using inauguration dates since 1928 and daily S&P 500 Index levels during 1928 through 2020, we find that: Keep Reading

Does the New Year’s Day holiday, a time of replanning and income tax positioning, systematically affect investors in a way that translates into U.S. stock market returns? To investigate, we analyze the historical behavior of the S&P 500 Index during the five trading days before and the five trading days after the holiday. Using daily closing levels of the S&P 500 Index around New Year’s Day for 1951-2020 (70 observations), we find that: Keep Reading

Does the Christmas holiday, a time of putative good will toward all, give U.S. stock investors a sense of optimism that translates into stock returns? To investigate, we analyze the historical behavior of the S&P 500 Index during five trading days before through five trading days after the holiday. Using daily closing levels of the S&P 500 Index for 1950-2019 (70 events), we find that: Keep Reading

Do options of individual stocks exhibit momentum and seasonality patterns? In their November 2020 paper entitled “Momentum, Reversal, and Seasonality in Option Returns”, Christopher Jones, Mehdi Khorram and Haitao Mo investigate momentum and seasonality effects for options on U.S. common stocks. They focus on performance of straddles, combining a put and a call with the same strike price and expiration date. They balance needs for liquidity and sample size by requiring positive open interest during the holding period but not the momentum calculation interval. Specifically, on each monthly option expiration date, they:

1. Form two straddles from near-the-money options expiring next month for each for each stock: (1) the pair with call delta closest to 0.5 for calculating momentum; and, (2) the pair with call delta closest to 0.5 and with positive open interest for both the put and the call when selected for calculating momentum portfolio return.
2. Construct from these pairs zero-delta straddles using bid-ask midpoints as prices and calculate monthly straddle excess returns relative to the 1-month Treasury bill yield. This process generates about 1,600 straddles per month with average monthly excess return -5.6% and very large standard deviations.
3. Calculate momentum as average monthly excess return over a specified lookback interval (rather than cumulative return, to suppress effects of return outliers).
4. Rank straddle returns into equal-weighted fifths (quintiles) based on momentum and calculate average return for each quintile and for a portfolio that is long the top quintile and short the bottom quintile.

Using end-of-day open interest and bid-ask quotes for call and put options on U.S. common stocks from OptionMetric and trading data for underlying stocks during January 1996 through June 2019, they find that: Keep Reading

Does crude oil (an important part of commodity indexes) exhibit an exploitable price seasonality? To check, we examine three monthly series:

1. Spot prices for West Texas Intermediate (WTI) Cushing, Oklahoma crude oil since the beginning of 1986 (34+ years).
2. Nearest expiration futures prices for crude oil since April 1983 (37+ years).
3. Prices for United States Oil (USO), an exchange-traded implementation of short-term crude oil futures since April 2006 (14+ years).

We focus on average monthly returns by calendar month and variabilities of same. Using monthly prices from respective inceptions of these series through October 2020, we find that: Keep Reading

Does the U.S. stock market respond predictably to simultaneous earnings announcements of attention-grabbing companies? In their September 2020 paper entitled “Famous Firms, Earnings Clusters, and the Stock Market”, Yixin Chen, Randolph Cohen and Zixuan Wang examine U.S. stock market (E-mini S&P 500 futures) responses to earnings announcement clusters (EAC) comprised of high-attention firms. They focus on the three most prominent pre-open (AM) and three most prominent post-close (PM) EACs in each of January, April, July and October, with each announcement weighted for prominence by associated total number of Dow Jones earnings news articles during the prior calendar year. Using earnings announcements and daily prices for S&P 500 components and minute-by-minute E-mini S&P 500 futures returns during 1999-2018, and associated earnings news articles during 1998-2018, they find that: Keep Reading

Do gold and gold mining stocks exhibit exploitable seasonality? Using monthly closes for spot gold and the S&P 500 Index since December 1974, PHLX Gold/Silver Sector (XAU) since December 1983, AMEX Gold Bugs Index (HUI) since June 1996 and SPDR Gold Shares (GLD) since November 2004, all through September 2020, we find that: Keep Reading

A subscriber asked: “Some pundits have noted that U.S. stocks have greatly outperformed foreign stocks in recent years. What does the performance of U.S. stocks vs. foreign stocks over the last N years say about future performance?” To investigate, we use the S&P 500 Index (SP500) as a proxy for the U.S. stock market and the ACWI ex USA Index as a proxy for the rest-of-world (ROW) equity market. We consider three ways to relate U.S. and ROW equity returns:

1. Lead-lag analysis between U.S. and ROW annual returns to see whether there is some cycle in the relationship.
2. Multi-year correlations between U.S. and next-period ROW returns, with periods ranging from one to five years.
3. Sequences of end-of-year high water marks for U.S. and ROW equity markets.

For the first two analyses, we relate the U.S. stock market to itself as a control (to assess whether ROW market behavior is distinct). Using end-of-year levels of the S&P 500 Index and the ACWI ex USA Index during 1987 (limited by the latter) through 2019, we find that: Keep Reading

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 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 through 2019 (70 observations), we find that: Keep Reading