Twitter/X can be a dangerous place. Lots of unchecked facts flying around. So I’m usually pretty sceptical about investment claims. But one of the reputable people I follow is @brett_donnelly. And during April’s market ups and downs, he said the following:
“In 2008, even as stocks fell 50%, long SPX on Tuesday was strongly positive for the year. Tuesdays tend to be reversal days in bear markets.”
To translate that quickly, what Brett is saying is:
- In 2008, the S&P 500 fell by 50%.
- But investing only on Tuesdays (buying at the start of the day, selling at the end), and being uninvested on the other days of the week, would have avoided the market pain and made you money.
First, I took a look at the data and Brett’s numbers absolutely stack up (told you he was worth following).
In 2008, the S&P 500 lost 49% from peak-to-trough. The average return for the 52 Tuesdays in 2008 was 0.44%. Every other day of the week had a negative average.
In fact, if you’d have just invested in the market on Tuesdays (buying at the start of the day, selling at the end), the total return in 2008 would have been 24%. Market down 50%, but the Tuesday Trade up 24%?!
Here’s the 2008 journey in chart form:
Source: FactSet/7IM
If you spend a lot of time talking about the benefits of long-term investing, these sorts of quirks can be uncomfortable to say the least. Have I been telling our investors the wrong thing? Should I start a Tuesday-only fund?
Well, maybe not quite yet.
After a bit more time in the data, there were two things I took away – one about investment strategy, the other about investor psychology.
First, Brett’s phrasing is bang on: “Tuesdays tend to be reversal days in bear markets.”
Tuesdays looked no better than any other day in the 2022 rate hike sell-off. So, it’s not a guarantee
That word ‘tend’ is important. It means more often than not. In 2008, Tuesdays were the bright spots. Same in 2020 with the COVID sell-off. But Tuesdays looked no better than any other day in the 2022 rate hike sell-off. So, it’s not a guarantee (nothing is in investing!).
And the context of ‘bear market’ is important too. The world spends more time growing than shrinking – more time in a bull market than a bear market. While I can’t tell you what day will do best in a bull market, the likelihood is they’ll all do pretty well (in 2023 and 2024, Mondays, Thursdays and Fridays all returned double-digits, while Tuesdays were basically flat).
Now, it is notoriously difficult to predict bear markets. Only trading Tuesdays in case of a bear market is like any other strategy investing for the end of the world – an intelligent-sounding way to miss out on the long-term returns you were investing for in the first place.
No magic answer here. We’ll just have to stick to long-term, thoughtful diversification.
So, what’s the psychology lesson? Well, the fact that the Tuesday effect happens at all is, to me, a demonstration of the underlying human-ness of markets. Why might it happen?
Rational, emotionless investment markets? Nope. Just the combined actions of ordinary people
It’s all about psychology (and a little about timezones, also a human invention).
US investors get nervous about something on a Thursday or Friday, when a lot of economic data comes out. Maybe they sell a little ‘just in case’. They stew all weekend. The news doesn’t help – lots of deep-dive investigations into whatever conflict/crash/catastrophe is causing the worry.
Asian investors have seen Friday’s US sell-off, been unable to do anything and been stewing themselves. First thing Monday morning in Tokyo, they sell ‘just in case’. Europe wakes up to Japan selling off. Further drops. US investors wake up to panicked sales and maybe have one more day of panic themselves. But by the end of Monday, the world hasn’t shattered. And there are lots of cheap stocks! Hence, turnaround Tuesdays…
Rational, emotionless investment markets? Nope. Just the combined actions of ordinary people, dealing with emotions, stress and fear like everyone else. And if I tell you that recent research suggests that individual investors spend just six minutes doing research before they trade , maybe the above starts to make sense.
Ben Kumar is head of equity strategy at 7IM
