Many stock-market observers have pointed out that the period around holidays is often a great time to invest. Whether this is due to a general sense of goodwill or some other cosmic force is hard to say, but the results are noteworthy.
In an academic study entitled “High Stock Returns before Holidays: Existence and Evidence on Possible Causes,” author Robert A. Ariel shows that “on the trading day prior to holidays, stocks advance with disproportionate frequency and show high mean returns averaging nine to fourteen times the mean return for the remaining days of the year.
“Over one-third of the total return accruing to the market portfolio over the 1963-82 period was earned on the eight trading days that fall before holiday market closings each year,” Ariel concludes.
The website StockCharts highlights what this means in dollars and cents.
S&P 500 Index Holiday Returns
|Holiday||Buy two days before, sell at year end||Buy one day before, sell at year end|
So How Much Should You Invest?
It advocates investing one-ninth (11.1%) of one’s capital in the S&P 500 Index 1-2 days before the nine major market holidays — President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Election Day, Thanksgiving, Christmas, and New Year’s — and, then, selling everything at the end of the year.
StockCharts notes that “if you had invested $10,000 in the S&P 500 Index in January 1928 and sold it all in December 1975, you would have ended up with $51,441. However, if you had invested one-ninth of your money just before each pre-holiday period (selling everything at the end of the year), you would have finished with $1,440,716.”
Notice, in particular, the healthy returns right before Independence Day. More recent research — with a longer investment window — from CXO Advisory Group confirms this market phenomenon over the Fourth of July holiday.
Focusing on the five trading days before and after fireworks fill the sky across the United States, CXO notes that “results suggest mostly strength around the holiday. Over the full sample period [1950-2018], average daily return during these ten days is 0.09%, compared to 0.03% for all days since 1950.
What Should We Expect from Independence Day?
Our own research, however, was less optimistic — at least in regard to the first trading day after July 4.
Over the past 50 years, the S&P 500 was down 30 times on the trading day immediately following Independence Day. The average cumulative return on that day was -0.18 percent, based on data derived from Yahoo Finance.
Does this mean you should be gutting your portfolio today (Friday)? Of course not, but it is something to keep in mind, especially when one considers that the end of the week traditionally produces positive overall returns.