Recent News
The Overnight Stock Market Secret
By Eric T. Ludwig CFP®
Published 4/8/2020
QUESTIONS:
- When does the stock market move the most: when it’s opened, or closed?
- During the pandemic crash, how have stocks performed during the day vs overnight?
- Do dividends make a difference to stock market performance?
As stocks started dropping in mid-February and the bottom fell out in March, something really started to bother me: why did it seem like all the market moves were happening overnight? I’d wake up in the morning and check the futures market, and the stock market would already be down 5%…before the opening bell rang!
Was this right? Let’s look:
I analyze the ETF “SPY”, which tracks the S&P 500. (On a side-note, SPY is the oldest ETF, which started trading in 1993).
From January 1st to April 7th of 2020, SPY is down -18% (including dividends, which we’ll come back to).
Now let’s divide the performance into two buckets: the movement during open trading hours, and the movement overnight.
Q1 2020: SPY Performance during:
Trading hours: +10%
Overnight: -25%
Look at those numbers again! This year, if you would’ve woken up and bought the SPY on each market open, then sold it on the each close, you’d be UP 10% for the year! On the other hand, if you would’ve bought the SPY at 3:00 pm each afternoon, then sold it the next morning, you’d be DOWN -25% for the year.
The suspicion was correct: not only is the majority of the market movement taking place when the market is actually CLOSED, stocks were actually creeping up when the market was open. Very strange.
This made me wonder if the phenomenon is some recent “glitch”. Doesn’t all the “news” and trading happen during the day, and therefore move the markets during the day? That would make sense.
Let’s back up a second. If you bought SPY on it’s first trading day on 1/29/1993, as of April 7th, 2020, you’d have a gain of exactly 900%. Get your financial calculator out, and you’ll find that’s a compound annual rate of 8.9%. Pretty sweet!
Now let’s ask, since 1993, what is the daytime performance? In other words, every day you woke up and bought SPY at 8:30 am at market open and sell it every day at 3:00 pm market close. Over the last 27 years, you would be…DOWN -3%! What! Yes, it’s very strange, but true. But the story gets stranger.
We know the buy-and-hold investor clocked in 900%. The own-it-only-during-the-day trader lost -3%. So now we know all the stock market performance happens overnight! That in itself is pretty incredible to me. I guess watching CNBC during the day is more of a waste of time than I realized. Just to repeat…almost all the return in the market is happening overnight.
Pop-quiz: what is the overnight trader’s return? Common sense would be 900% – 3% = 897%. But, that’s incorrect. The overnight trader is up 522%. How could that be = dividends!
1/29/1993 – 4/7/2020: SPY Performance during:
Trading hours: -3%
Overnight: 522%
Yes, dividends! The overnight trader is never receiving dividends because he sells out every morning. The dividends from the S&P 500 since 1993 attribute 378%. The overnight performance is the other 522%. And the daytime performance is -3%. Crazy, but true.
This solidifies 3 points:
- The “news” and “big market moves” during the day, don’t matter as much as we thought, if at all. It’s all about what happens overnight
- While the S&P 500 has risen 900% since 1993, 378% of that return is from dividends…Dividends matter!
- Buying-and-holding gets you all the benefits of the overnight moves AND all the dividends.
Summary:
- The overwhelming majority of the stock market moves take place when the market is closed, not during the normal trading hours.
- For the first 3 months of 2020, the stock market was positive during normal trading hours, and all the losses took place overnight.
- Should we only own the overnight session then? Don’t forget about dividends! Missing out on dividends would mean missing out almost half the S&P 500’s return over time!
*calculations used Yahoo! Finance data. Calculations are the authors. This is not an investment recommendation to buy or sell any investment.
November 2018 Market Update
In this video we discuss:
• How rate changes and Federal Reserve Jay Powell’s comments have impacted markets in November.
• Current Market Valuations and expectations of US Stock market returns over the next 10 years
• Current Investor Sentiment readings, and what they mean
• A big IF from the G20 summit IF something positive happens on trade with Trump and China
Stock and bond market update provided by Eric Ludwig CFP®, CEO of Stockbridge Private Wealth Management.
View historical PE ratios: http://www.multpl.com/shiller-pe/
AAII Investor Sentiment ratio: https://www.quandl.com/data/AAII/AAII…
Investors Intelligence Advisor’s Sentiment Report: http://www.investorsintelligence.com/…
Mid-term elections 2018. What stocks will do next
October 2018 Market Review
Is 2020 the Year for Recession?
Is 2020 the Year for Recession?
According to former Fed Chair Ben Bernanke, the U.S. economy will get a Wile E. Coyote surprise in 2020. You know, just when everyone thinks he caught the Roadrunner, Wile notices he has run straight off a cliff, plummets seemingly forever before hitting the bottom in a cloud of dust, and then, just for spite, an anvil lands on his head.
In other words, Bernanke sees a 2020 recession looming. Other analysts are saying it, too. And whenever they do, they get their name in the headlines. Scaremongering attracts attention.
But there is good news here: The Pouting Pundits of Pessimism don’t think the crisis starts tomorrow. No longer does some exogenous crisis event – say, Brexit, or Grexit, student loan defaults, etc., – threaten imminent collapse. Now, the recession doesn’t happen for another two years.
Another interesting detail: the new problem is that the economy is growing too fast. Remember when analysts used to say, “since the economy is growing less than 2% annually, it means a recession is coming”? Now, Bernanke says the U.S. applied stimulus (in the form of a tax cut) “at the very wrong moment,” with the economy already at full employment. In other words, real GDP growth is too strong, so the Fed will over-tighten and a recession is inevitable.
Now we agree that a recession is coming – someday. Guess what happens after Summer? Winter! What happens after expansion? Recession! Recessions are a fact of life, like death and taxes. But predicting one in 2020 – and being right about it – is like reading tea leaves, it’s pure chance. No one, and we mean no one, can honestly see that far in the future – not with the clarity expressed by these forecasts.
No one knows exactly what the Fed will do, not even the Fed. Let’s say they follow their forecasts, raising fed funds to 3.5% in 2019. That alone doesn’t tell us if policy is “tight.”
While most recessions are caused by an excessively tight Fed, we don’t think the Fed is too tight until it drives the federal funds rate close to, or above, the rate of growth in nominal GDP. Over the past five years, nominal GDP has averaged about 3.9%. Which means if the Fed were to raise the funds rate by 0.25% three more times in 2018 and four times in 2019 (reaching 3.5%), and if nominal growth slowed to 3.5%, the Fed would be tight at that point. A recession would be possible.
However in the past year, nominal GDP growth has accelerated to 4.7%, and next year it could be as high as 6%. That means a 3.5% federal funds rate would not be restrictive. The Fed would have to raise rates faster and farther than any forecast we have seen in order to be “tight” going into 2020. At the same time, there are still at least $1.9 trillion in excess bank reserves. Until those reserves are eliminated, no one knows if raising rates can actually cause a recession.
We do have one major worry. Government spending is rising rapidly, and the deficits this spending creates will put pressure on politicians. If they were to raise tax rates, this could cause potential problems for U.S. growth.
But the bottom-line remains: the U.S. is not facing an imminent threat. That’s why doom and gloomers have shifted to forecasting future recessions, not looming crises. But we think it’s not going to be the economy that gets an anvil on its head in 2020. More likely, it’ll be investors who believe in the recession forecast.