Understanding how the stock market might be affected by the holiday season will help you invest well and beat the markets. Investors sometimes refer to a pre-holiday market aberration as the “holiday impact.” This is because the penultimate trading day before a scheduled long weekend or holiday is when a stock market typically surges.
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The holiday impact is linked to investors’ general optimism and confidence. The fact that customers tend to spend more money around the holidays is another essential explanation for the market surge. The share prices of retailers, in particular, may increase as a result.
Many traders and market analysts take time off work during the holidays to relax from their regular trading and research schedules. Those investors view the holidays as a time to unwind and refresh. On the other hand, some traders see the season as a chance to work harder and get some tactical advantages in the market, maybe by taking advantage of the period when many other traders take holidays. Understanding the holiday impact will help you get through it, no matter what sort of investor you are.
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The Holiday Seasons and Stock Trading Volume
Because both professional and ordinary traders take vacations during the holidays, the stock trading volume typically decreases. However, that does not imply that there is no trade going on. Stock prices may also be more erratic than usual since there are fewer buyers and sellers to assure liquidity because fewer traders are active in the markets.
This elevated stock volatility may offer opportunities to profit from market swings for traders looking to make quick gains over the holidays.
Furthermore, just because the stock market is less active doesn’t mean everything is tranquil. Keeping up with political and economic news throughout the holidays may help you profit from upcoming market developments as these topics continue to impact stock prices.
How Holidays Affect Stocks
Santa Claus Rally
The stock market historically has increased throughout the final five trading days of the year and the first two market days of the following year. This is known as the “Santa Claus rally.” But it also belongs in the larger category of the holiday impact. This singular event, in which the S&P 500 (SPX) stock market index has averaged a gain of 1.6% with positive returns for more than 75% of the period since 1969, has been interpreted in various ways throughout the years. Gains may be credited to year-end bonuses, the cessation of tax-loss selling, and the “Christmas spirit” of the season.
Traders might benefit from the Santa Claus surge in several ways. The Santa Claus rally lends itself considerably better to shorter-term tactics because it lasts for seven days. Buying on the first of the final five days of the year and selling at the end of the second day of the New Year would be the easiest strategy. Many investors also choose to use day-trading tactics and consider the seven-day Santa rally phase within shorter timeframes.
The Martin Luther King Jr. Day Holiday Effect on Trading
Martin Luther King Jr. Day is the first holiday of the year. The third Monday in January is always designated as a holiday, and the stock market is closed that day. The holiday can be observed as early as January 15 and as late as January 21.
Although Martin Luther King Jr. Day was declared a federal holiday in 1986, it wasn’t until 1998 that the exchanges began shutting on that day. On average, the market has been more upbeat on the Friday before Martin Luther King Jr. day and less so on the Tuesday after. According to Dow Jones Market Data, the S&P 500 and the Dow have since had an average 0.2% gain on the trading day before the holiday and a 0.2% loss on the following trading day.
The statistics for MLK week since 1998 are broken out per day of the week in the table below. As you can see, the SPX has a negative average return for three of the four trading sessions in the post-holiday week: Tuesday, Thursday, and Friday.
Source: Yahoo Finance
George Washington Day/President’s Day Holiday Effect on Stocks
Presidents’ Day is a federal holiday in the U.S. It is observed in honor of all U.S. presidents.
The only holiday that displays stock market frailty on the days preceding and following is Presidents’ Day. Over the past 22 years, trading has been increasingly unfavorable. The Friday before this three-day break in the middle of winter is particularly terrible, but the Tuesday following is not as bad for the markets, and has lately shown some improvement despite having higher average losses.
Saint Patrick’s Day – Good Fortune for Stock Investors
St. Patrick’s Day is observed annually on March 17 around the globe. Even though there isn’t a formal bank or stock market holiday, millions (perhaps billions) of people celebrate it yearly.
The S&P 500 stock market index has historically been more likely to increase on St. Patrick’s Day than on the great majority of other days throughout the year. The S&P 500 has increased on St. Patrick’s Day 80% of the time during the last 20 years. Furthermore, when compared to other trading days of the year, typical S&P 500 returns on St. Patrick’s Day are rather robust. Since 1997, the S&P 500 500 has returned an average of 0.72% on St. Patrick’s Day.
Good Friday Could be a Good Day for Stocks
Even though Good Friday is neither a recognized government holiday in the United States nor a typical bank holiday, markets are closed this Friday before Easter. Many international markets close on this day, including those in the United States, such as the New York Stock Exchange, the Nasdaq exchange, and the Chicago commodities exchange.
The Stock Market will often rise in the weeks following Good Friday and Easter Sunday. In 18 of 30 (60%) occurrences since 1989, the S&P 500 has seen a positive return the week after Easter Sunday, with an average weekly return of 0.34%. In a similar vein, the S&P 500 has often had favorable returns in the month immediately after Easter.
Although Wall Street customs predict that the market will trend upward as we approach Easter weekend, the data is inconclusive. The market may have a slight “up-down-up” tilt on the Thursday before Good Friday and the Monday and Tuesday that follows. However, it is impossible to forecast how the market will perform in any given year. Therefore, trading decisions should not be based solely on “normal Easter trends.”
Observing Memorial Day and Trading Stocks
To remember the men and women who have lost their lives while serving in the military, the last Monday in May is commemorated as a federal holiday in the United States. Congress proclaimed Memorial Day a national holiday in 1971.
The S&P 500’s daily performance from the Friday before Memorial Day through the end of the holiday week is displayed in the table below. Since the Friday before the long weekend often generates a gain that is twice as great as the typical Friday return, traders want to increase their holdings before the long weekend. Even though it was positive just 44% of the time over Memorial Day week, Tuesday had an impressive gain of 0.19% on average. Moreover, Thursday is frequently a great day for stocks.
Source: Yahoo Finance
The S&P 500 Index (SPX) weekly returns between 1971 and 2010 are summarized in the table below. Stocks have been doing rather well since the financial crisis aftermath. Longer term, Memorial Day week beat the normal equities week. The index gained 0.52% on average during the holiday week but only 0.17% on any other week.
But an entirely different tale has emerged in more recent years. During Memorial Day week, the S&P 500 lost 0.5% on average and had more losses than gains. But since 2010, the typical week has increased by 0.22%, with more than 60% of those increases being positive.
Source: Yahoo Finance
Independence Day, but No Fireworks for Stock Market
Since July 4 is a federal holiday honoring the U.S.’s independence, the financial markets in the U.S. are closed on that day. All U.S. stock markets are closed, and the bond market even closes early on the business day preceding the holiday. The day before or the day following Independence Day, if it comes on a weekday, is often a trading day for the U.S. stock markets.
Stock trading tends to be light throughout the summer, and the influence of the holidays doesn’t help. The day before and following July 4 has historically seen average losses for the main indices, but these losses haven’t been significant enough to justify any form of portfolio protection.
Trading in the Stock Market on Labor Day
Another popular time of vacation for traders and investors is the weekend before Labor Day. Labor Day is a federal holiday observed in the United States on the first Monday of September. In the past, business activity was brisker before the long weekend. The three days preceding Labor Day increased the Dow Jones Industrials in twenty-five of the twenty-eight years between 1950 and 1977.
However, the Labor Day weekend holiday effect has been mediocre and ambiguous over the past few decades. Even while good overall gains on the day before and the day after have been common since 1990, their frequency is just significantly more than 50% of the time.
Moreover, it’s crucial to remember that Labor Day often marks the beginning of increased market activity after the summer lull.
How Thanksgiving Affects Stocks
Thanksgiving Day is a federal holiday; hence the U.S. financial markets are closed that day. It is celebrated on the fourth Thursday of November each year. You may have heard that the week around Thanksgiving is typically favorable for stocks. Since 1950, Dow Jones Market Data has been tracking historical performance. The results are as follows: the S&P 500 has experienced gains over Thanksgiving week (Monday, Tuesday, Wednesday, and Friday) 49 times out of 72 occasions, not including this year. And from Wednesday to Friday, it increased by 60 times.
Source: MarketWatch
Thanksgiving may only have a short-term impact on Wall Street trading, but long-term projections remain uncertain.
Conclusion
If you decide to engage in any holiday trading, do so cautiously. While there may be possibilities to profit over the holidays, stock trading could be challenging. If the level of volatility bothers you, it might be best to stay away from the game. Always keep in mind that there will be more trading opportunities down the road.
Instead of searching for trading chances to achieve short-term gains, long-term investors may find that the holiday season is a better time to rebalance their stock portfolios before the end of the year. Whether you’re a trader seeking quick profits or an investor trying to accumulate riches by employing long-term investment strategies, TipRanks can help you achieve your objectives. TipRanks offers a number of tools that let you trade stocks like a top player. These study elements might be an excellent complement to your favorite fundamental and technical indicators.
