| End Of The Month Is Payday For Stocks Too |
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| lunedì 09 aprile 2007 | |
End Of The Month Is Payday For Stocks Too Woody Allen once remarked that 80% of success is just showing up. The corollary to this for stock market investors may be that 100% of success is not showing up 80% of the time. In other words, just a handful of days each year add up to the entire return for stocks with the rest pretty much a wash. This is a key selling point for buy and hold investing since it's just as easy to miss out on these up days as it is to sit out one of the down days and, on average, one is better off taking the good with the bad. Devotees of the efficient markets hypothesis scoff that only a clairvoyant investor with all the up days marked on his calendar could hope to make money hopping in and out of the market on a consistent basis. As it turns out, though, no crystal ball is necessary to identify those days and capture all of the market's return - they occur like clockwork every month. In one of the more bizarre challenges to market efficiency, all of the stock market's historical return could have been captured over the past 110 years by holding stocks for four days each month or 20% of all trading days.
100% of Returns In 20% of The Time The so-called "turn-of-the-month effect," first identified by academics Josef Lakonishok and Seymour Smidt in 1988, shows that stock returns tend to be higher on average on the handful of days around the end of each calendar month. The phenomenon, which continues to baffle finance experts, was recently revisited in a study by Wei Xu and John J. McConnell of Purdue University that shows the effect continuing since its initial discovery. They looked at the 80 years from 1926-2005 and a number of sub-periods as well, focusing on the returns for the last and first three trading days of each month. The average return per day during this four-day period was 0.15% without dividends. On an annualized basis, this works out to 7.2%, about the average capital gain for stocks over this period. "The message is that investors aren't rewarded for bearing risk the other 16 days," said Xu, who now works for hedge fund Mathematica Capital Management, which applies quantitative investment strategies to reap consistent returns. She couldn't discuss whether her firm uses turn-of-the-month in its portfolio. The turn-of-the-month effect doesn't mean that stocks never go down during these days or that there aren't some very good days other times of the month - it only represents a multiyear average. The effect isn't limited to the ends of quarters when "window dressing" by mutual fund managers may explain some outperformance, though this pumping up of prices does make the ends of March, June, September and December slightly better. Ditto for other phenomena like the January effect or presidential cycles. Other seasonal distortions enhance the turn-of-month effect. For example, another group of academics, Xiaofeng Zhao, Kartono Liano and William G. Hardin III, showed that annualized returns at the turn-of-the-month for the Standard & Poor's 500 from 1960-2001 in the second half of presidential terms was a whopping 56.31% versus 6.74% for the other days. During the first half of the term it was 17.97% versus a loss of 0.85%. Profitable But Perplexing During the 1960s, the belief that financial markets are efficient began to gain support within academia and became widely accepted in the investor community after the release of economist Burton Malkiel's 1973 bestseller "A Random Walk Down Wall Street". The original efficient markets hypothesis wasn't monolithic, having been split into the strong, semi-strong and weak forms, but all three have come under pressure in the last few decades by behavioral finance and discoveries like the turn-of-the-month effect. Other assaults on market efficiency include the well-known January effect, mentioned as early as the 1940s but brought to widespread attention in 1976 by academics Michael Rozeff and William Kinney. They showed an average monthly gain of 3.48% in January versus 0.42% for other months from 1904-1974. Another is the Monday effect, highlighted by Kenneth French, that shows that stocks underperform on that day, and thus returns can be enhanced by buying after Monday and selling before the weekend. Both the January and Monday effects have lessened since becoming widely known, but the turn-of-the-month has continued to perform well in recent years, representing a real way to make excess returns through market-timing. Sifting the data is one thing, but understanding it is another. Xu dissected the history of the turn-of-the-month effect and found that it applies to most foreign stock markets as well. She found that it had little to do with risk versus reward since those days weren't more volatile, nor did they have higher volume. Mutual fund inflows were disqualified as a factor, as was the timing of people's paydays and hence brokerage account contributions. It may be more of a factor in retail investors' actions since small and low-priced stocks perform disproportionately well. Other than the fact that it has something to do with investor psychology, Xu said she has no solid theory for why it works. "It's very perplexing." (Spencer Jakab, a columnist who provides insightful and unique takes on the stock market, previously wrote about the energy market.) From Dow Jones Newswires 04-09-07 1018ET |
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