What is the Calendar Effect?
The calendar effect is a collection of assorted theories that assert that certain days, months or times of year are subject to above-average price changes in market indexes and can, therefore, signal good or bad times to invest. Some theories that fall under the calendar effect include the Monday effect, the October effect, the Halloween effect, the Santa Claus rally and the January effect.
Understanding Calendar Effects
Most of the evidence for the calendar effect is anecdotal, although there is a slight statistical case to be made for some of them. This slight confirmation is more than enough to encourage some investors to place their faith in them. Academics and practitioners alike realize most of the observable correlations in calendar effects are spurious in nature — but these interesting effects and indicators make for entertaining financial headlines all the same.
Proponents of the October effect, one of the most popular theories, argue that October is when some of the greatest crashes in stock market history, including 1929's Black Tuesday and Thursday and the 1987 stock market crash, occurred. While statistical evidence doesn't support the phenomenon that stocks trade lower in October, the psychological expectations of the October effect still exist. There is at least an equally good case for saying October is taking the fall for a subtle September effect.
Calendar effects are generally not consistent enough to be tradable in any useful way. An investor is no better off, on average, buying or selling in January versus September for example. So instead of looking at the calendar, an investor needs to look at their portfolio to decide if there is a reason to buy, sell or otherwise rebalance.
Calendar Effects and Other Spurious Indicators
Calendar effects are part of the odd ball assortment of novelty indicators. For example, the Super Bowl Indicator is a superstition purporting the stock market's performance in a given year can be predicted based on the outcome of the Super Bowl of that year. Another pseudo-macroeconomic concept, it states that if a team from the American Football Conference (AFC) wins, there will be a bear market (or down market). But if a National Football Conference (NFC) team wins, we'll have a bull market (up market).
As of January 2017, the indicator was correct 40 out of 50 times, as measured by the S&P 500 Index – a success rate of 80%. Not bad, however, since a particular football league winning a Super Bowl and the U.S. Stock market have no real connection. This effect is a spurious correlation similar to the discovery that butter production in Bangladesh correlates strongly with the S&P 500 performance. There is no real predictive power in calendar effects or these other indicators, so investors shouldn't be unloading or loading up their portfolios based on the outcomes of sporting events or the calendar month.