When Does the Stock Market Go Up?

Not all days, or times of day, are created equal for stock investors

It is a truth universally acknowledged that the stock market is one of the greatest engines for creating wealth. Individuals of all different means can purchase stakes in the country’s, and nowadays the world’s, most well-established and profitable companies, earning an average return (over the last century) in excess of 10% per year. Compounded over a typical 30-year time horizon, stock returns convert each dollar saved and invested into more than $17.

However, we also now know that the stock market’s expected return is not the same at every moment in time. Instead, research has shown that there are specific days, and even times of day, when the stock market is more likely to go up than on other days. In this post, I will describe three such well-known patterns in stock returns, among many others that have been studied.

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Key Economic Announcements

Financial prices react to new information and some days happen to be more informative and newsworthy than others. While some news releases, such as earnings announcements, pertain to only one stock, others, such as economic or interest rate announcements, affect nearly all stocks and thus move the whole stock market. In a 2013 article entitled How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements, Pavel Savor and Mungo Wilson show that most of the excess returns (relative to Treasury Bills) of the stock market are accumulated on days when major economic news is released.

On key economic announcement days, which include inflation figures (both CPI and PPI), the employment report, and Federal Reserve (FOMC) interest rate decisions, and which are well-known to everyone in advance, the stock market excess return averages 11.4 basis points, while on all other days, it is only 1.1 basis points. Even though these key economic announcement days are fairly rare, making up only 13% of all trading days, they generate more than 60% of the total excess return from the stock market.

Stock investors are earning their entire return while the market is actually closed

Fed Announcements

If we look closer, the pattern becomes even more startling. A 2015 article entitled The Pre-FOMC Announcement Drift, by David Lucca and Emanuel Moench, focuses on intra-day stock returns in the days around Federal Open Market Committee (FOMC) meetings. The FOMC meets eight times per year and, since 1994, has announced its decision shortly after 2pm in the afternoon. The graph above shows the hour-by-hour returns around FOMC announcements, compared with other days. In the 24 hours prior to the Fed’s announcements, the stock market rises by an average of 49 basis points, more than twenty times the average return on all other trading days. The returns accumulated in the 24 hour period before Fed announcements, which only happen EIGHT times per year, make up around 80% of the entire excess return of the stock market.

In a related 2019 article by Anna Cieslak, Adair Morse, and Annette Vissing-Jorgensen, the authors show that stock market returns actually follow a bi-weekly cyclical pattern around Federal Reserve meetings (see graph above). They tie this cycle to rare inter-meeting cuts in interest rates, informal communication by Fed officials with market participants, and reversion after extremely poor stock market performance in response to a “Fed put” policy of propping up the stock market.

Altogether, this line of research clearly conveys the point that the stock market’s return is accumulated on the days that investors are most exposed to macroeconomic risk.

Benjamin Graham famously called the stock market a weighing machine for companies, but these unusual price patterns are a reminder that this machine still has many enigmatic parts 

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Weekend Effect

Since 1953, the U.S. stock market has been open five days each week, excluding holidays. One interesting question was whether stock returns are accumulated in trading time or in calendar time. If it’s the latter case, one would expect higher average returns on Mondays since the returns in that day represent the total returns to stock investors for three calendar days, from the Friday close to the Monday close.

In 1980, Ken French wrote a famous paper showing that the stock market’s excess returns are significantly negative on Mondays. From 1953 to 1977, average Monday returns were -17 basis points, while they were positive on the other four days of the week. Other papers confirmed this puzzling result in earlier periods going back to the 1920s, and it was dubbed the “Weekend effect” or the “Monday effect”. Multiple theories explaining this anomaly have been proposed but no theory has gained widespread backing.  

Interestingly, in recent decades, a number of follow-up papers examined the Weekend Effect and found that it has become much weaker and is predominant among small-cap and mid-cap stocks. After 1977, Monday stock returns have averaged a statistically insignificant -4 basis points, suggesting that either the original result was due to chance or that financial markets have changed to eliminate most of this day-of-the-week anomaly.

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Overnight Puzzle  

Not only do expected stock returns vary based on the day, they also vary based on the time of day. In a 2007 paper, Michael Cooper, Michael Cliff, and Huseyin Gulen compare the total returns accumulated during trading hours, i.e., from the open at 9:30am to the close at 4pm, to those accumulated overnight, i.e., from the close at 4pm to the next trading day’s open at 9:30am. They found that stock investors are earning their entire excess return while the market is actually closed (see graph above). A more recent analysis covered by the New York Times in a 2018 article entitled The Stock Market Works by Day, but It Loves the Night showed that this pattern still holds more than a decade after the first paper was written. Again, many theories have been put forward for this puzzle but the best explanation seems to be that most news (including foreign news) comes out during the 17.5 hours that the market is closed, both in the early morning and in the evening, so investors require extra compensation for their risk exposure during this period of time.

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Conclusion

Not all days, or times of day, are created equal for stock investors. When uncertainty is higher, investors require higher rates of return for compensation. Some patterns may be permanent while others, such as the Weekend Effect, might be temporary. Benjamin Graham famously called the stock market a weighing machine for companies, but these unusual price patterns are a reminder that this machine still has many enigmatic parts.  

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