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Happy Saturday!

As the weather gets warmer and flowers start to bloom, the spring season is here, and it’s time to shift our attention toward the upcoming Easter holiday 🌸

In addition to its spiritual and cultural significance, Easter can also have an impact on the stock market, as traders and investors adjust their behavior and activity levels in response to the holiday season.

All this, and more, in just five minutes to read 📖

QUOTE OF THE DAY

“Investment success doesn’t come from buying good things, but it comes from buying things well.”

— Howard Marks

THE HOLIDAY EFFECT

Stock Market Patterns Around Easter

Even though Easter’s not a federal holiday in the U.S., it does affect the stock market, which is closed on Good Friday.

There’s a phenomenon known as the “holiday effect” or the “pre-holiday effect” that marks a slight rise in stock prices on the day before a holiday or a long weekend.

In other words, when holidays loom around the corner, the stock market tends to gain on the final trading days before. The mechanisms behind the Holiday Effect appear to be consistent, too.

Behavioral factors

The week before Easter typically yields positive returns for investors, but why?

The anomaly is thought to be primarily explained by behavioral factors:

• Short-sellers close their risky positions before the holidays, hedging against unexpected news developments over the break.
• Investors’ increased optimism around holidays, indicating greater confidence in future prospects. Our emotions often impact our world outlook, and it’s possible that around major holidays, the crowd’s collective psyche marginally improves.
• Customers tend to spend more money on the holidays like Easter, Thanksgiving, or Christmas. As a result, many industries mark an increase in sales.

Liquidity effects

Another factor could be liquidity: The theory says pre-holiday days on the market are often characterized by lower liquidity as many market participants aren’t involved in the market or have decreased their activity.

This lack of liquidity makes conditions ripe for volatility, which is why, perhaps, stock market moves leading into holidays are above average.

Research shows that especially positive abnormal returns occurred three or four trading days before public holidays and negative abnormal returns one or two trading days after public holidays.

The results also suggest that the Holiday Effect was more visible in relatively quiet periods than in turbulent ones, and it particularly influences the returns of small-cap companies, which are less liquid.

Looking forward

According to Schaeffer’s Investment Research experts, if markets are up year-to-date heading into Easter weekend, they tend to remain in positive territory through the end of the year.

For the past 30 years through 2018, this correlation has been relatively high.

During that time, the S&P 500 Index averaged a 1.23% return the week before Easter, while the typical weekly return has been about 0.18%.

Moreover, the percentage of positive returns was slightly better in the week before Easter, compared to all other weeks (63% vs. 57%). For the last three decades, the S&P 500 has usually experienced an increase of 0.51% on the Thursday before Easter, with returns being positive 70% of the time.

What’s fascinating is how many other holidays demonstrate this effect, like:

• St. Patrick’s Day – The S&P 500 has increased on St. Patrick’s Day 80% of the time during the last 20 years.
• Thanksgiving Day – From 1950 through 2021, the S&P 500 has experienced gains over Thanksgiving week (Monday, Tuesday, Wednesday, and Friday) 49 times out of 72 occasions. And from Wednesday to Friday, it increased on 60 occasions.
• The “Santa Claus Rally” – In the week leading up to Christmas, the S&P 500 stock market index has averaged a gain of 1.6% with positive returns more than 75% of the time since 1969.

Nevertheless, it’s better to avoid making any hasty decisions based on seasonal stock market fluctuations and ensure that if you modify your portfolio, it aligns with your long-term investing strategy.

Dive deeper

If you’re interested in understanding the factors behind market cycles in depth, we recommend reading Mastering the Market Cycles by the iconic thinker and investor, Howard Marks.

SEE YOU NEXT TIME!

That’s it for today on We Study Markets!

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All the best,