Independence Day euphoria: Stocks nearly always jump before 4 July

 
Peter Spence
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US stocks hit fresh record highs yesterday (Source: Getty)

Yesterday saw tremendous performance by US stock markets as they closed early for the week, reflecting the national Independence Day holiday, which falls today.

The Dow Jones Industrial Average moved above the 17,000 mark for the first time in its history, propelled by labour market data that crushed analyst expectations.

Perhaps we shouldn't be surprised that equities performed so well, the data aside. Academics find that US stocks often move up before a national holiday. One paper finds that "abnormally high returns" are seen on all three major US stock markets the trading day before a holiday.

For UK-based traders, the same also seems to apply. Mean returns of the FT 30 index on the trading day before a UK holiday are more than five times as much as the ordinary daily return.

Conversely, Valentine's Day markets rarely offer traders any love, as stocks rarely rise on 14 February. While perhaps counterintuitively Friday the 13th is not that unlucky - for stock returns at least.

But there is one problem with trading around 4 July: liquidity in equity markets tends to fall around holidays, including Independence Day. Academics find that volumes fall around holidays, and describe trading as "unusually sluggish" on days preceding or following major holidays.

That in turn appears to cause a decrease in market depth and an increase in quoted spreads. That will likely reduce the ability of investors to trade efficiently, and could result in sharper swings in financial markets, as large block trades will move prices more dramatically.