Through bull and bear markets, investors have been able to find outside returns – a nearly 8-fold gain in the past quarter century – through a unique strategy: by buying ETFs at the market's close and selling them at the market's open the next day. This after-hour period is often marked by predominantly positive earnings news which tends to lift prices on individual stocks. The result is a "halo effect" which also has boosted ETF prices. Bespoke Investment Group suggests that nearly all market gains since 1993 - as represented by the SPDR S&P 500 Trust ETF (SPY) - have actually come outside of standard trading hours, per a recent detailed report by Barron's. However, reaping these kinds of gains may no longer work as a result of President Trump's tweets and the ongoing trade war between the U.S. and China.

What It Means For Investors

According to Bespoke co-founder Justin Walters, whose firm tracked the SPY fund since 1993, investors who "bought at the close of every day and sold at the next trading day's open" would be up 672% right now, not even including dividends. Conversely, adds Walters, "had you done the opposite and bought at the open every trading day and sold at the close that same day, you'd be down 11.5%." One reason for the big gains after normal trading hours is that important news like earnings reports tends to come to light at that time, and the reports have been overwhelmingly positive as a general rule. This news is then priced into individual stocks by the time of the next market open, and thus into ETF prices.

That's not to say that individual investors should focus only on night trading. While many brokers do offer some access to after-hours trading for retail clients, high transaction costs and liquidity concerns may be prohibitive factors, according to Bespoke macro strategist George Pearkes, as quoted by Barron's.

Why 2019 Is Different

There's also evidence suggesting that the trend has shifted in 2019, at least for the short term. Investors who bought SPY at the market's open and sold at the close each day for 2019 would be up 15.1%, while after-hours traders would only be up 4.3%.

Bespoke cites two primary reasons for the recent shift in the halo effect. The first is President Trump's erratic tweeting schedule, and the second is the ongoing trade war with China. Prior to the current administration, presidents were not likely to tweet things "that are antagonistic or in some way market negative with respect to U.S. trade early in the morning or late at night," Pearkes says. By contrast, Trump's advisors often smooth over Trump's comments during daytime trading hours, often pushing up stocks.

What's Next

In the short term, this means that investors who relied on after-hours gains to boost their ETF returns may have to rethink their strategies, especially since trade tensions between the U.S. and China once again are ratcheting up.