The Memorial Day Effect on the Stock Markets
North American equity markets have struggled during the month of May. Headlines have focused on concerns about sovereign debt issues, rising inflation rates, increasing interest rates and a slow down in U.S. economic growth. However, investor enthusiasm for equities could turn positive before the end of the month due to an annual recurring event, the U.S. Memorial Day holiday.
Canadian equity markets have a history of moving higher during and just after the US Memorial Day holiday held on the last Monday of May. This year the holiday falls on May 30th, a week after the Victoria Day holiday in Canada. Markets in the US are closed. However, Canadian investors have the distinct advantage of trading the session without the usual influence of our neighbors to the south. Volumes customarily are low that day, but the probability of gains is high. Since 1980, the S&P/TSX Index has averaged a return of 0.38 percent per session. The Index has produced positive results in 25 of the past 31 periods. Returns ranged from a loss of 0.19 percent in 1994 to a gain of 1.64 percent in 1980.
Returns during the remaining four trading days of the week following the Memorial Day holiday also have been respectable. Average gain per period by the S&P/TSX Composite during the past 31 periods was 0.91 percent. Returns by the S&P 500 Index during the same four trading days following the Monday holiday were even higher. Average return per period was 1.07% compared to an average return per period of only 0.06% during the week leading into the Memorial Day long weekend. A closer examination of returns during the week following the holiday shows that Wednesday and Thursday recorded the highest probability of positive results. Returns were positive 71 percent of the time.
Investor sentiment and trading activity favourably influence equities markets during the holiday period. Investors typically are in an upbeat mood with the Memorial Day holiday marking the unofficial start to the summer season. Many investors take advantage by using vacation time. Equity trading volumes are more subdued than usual. Similar tendencies have been observed near other U.S. holidays including Christmas, Independence Day and the Thanksgiving holiday. Equity markets also benefit during these periods from end of month cash inflows from pension plans and 401k plans.
Equity investors on this side of the border can take advantage. Canadian equity markets remain open on Memorial Day. At the very least, Canadian investors should not sell equities on the day before the holiday unless necessary. The easiest way to take advantage is to own Exchange Traded Funds that track the Canadian equity market including iShares S&P/TSX 60 Index Fund (TSE:XIU) or the Horizons S&P/TSX 60 Index ETF (TSE:HXT) on the day of the holiday itself. In addition, Canadian investors can take advantage during the holiday shortened week by focusing on trading opportunities in Exchange Traded Funds that track US indices. For example, exposure to the S&P 500 Index can be obtained through the Horizons S&P 500 Canadian Hedged ETF (TSE:HXS).