In the past few years, there's been lot of buzz about stocks getting all their gains at night. This is true in the long run. The research around this subject has only consisted of Night vs Day vs Price Return of the SPY (the oldest S&P 500 ETF). This post will take into account total return of the SPY.
Sources: The data for this research uses total return and price return for SPY sourced from Morningstar to create hypothetical scenarios which should not be regarded as a buy/sell recommendation for any mentioned security, a recommendation on investment strategy, or regarded as investment advice.
The chart above highlights Night vs Day Return since the inception of SPY with a $100k starting value. It's safe to say that stocks have all of their gains at night. Night return is if an investor buys the close and sells the open the next day. Day return is if an investor buys the open and sells the close during the same day. The day trade in the SPY has kept an investor essentially flat since inception (ending value is about $101k).
All the research for the this topic consists of Day, Night, and Price of SPY (the growth of the price of the ETF) and compares the returns since Inception of SPY ignoring other time periods. Surprisingly nobody has bothered to compare these returns to Total Return or in other time periods to see how they interact. The second chart above shows Total Return which blows both Night and Price Returns out of the water by nearly 50%.
Various Time Periods:
The 90s were marked by good economic times, solid job growth, and tax relief making stocks attractive. Total, Night, and Price Return all move in the same direction without much difference at the end.
The Lost Decade (2000-2010) was a decade beginning with the bursting of the Dot-Com Bubble only to later face the Great Financial Crisis. Returns were negative for the decade considering both Price and Total Return of SPY. Surprisingly, the Night Return was positive and the only return where an investor didn't face a 50% decline twice in a decade.
If we're to start from the bottom of the GFC around the time the bull market fueled by low interest rates, low inflation, low unemployment, lower taxes, and more, both Price and Total Return crush Day and Night Return which are almost even. There was a glimpse of volatility in 2016 around election time, and Night Return suffered. The past 5 years as a whole have been the more volatile period of the bull market.
In the past 5 years we've seen trade wars, tax cuts, tax increases, a pandemic, monetary easing, and now tightening. It's been a more volatile period of the bull market, so the assumption Night Return would outperform Day was true. Until zooming into 2020.
For the worst part of 2020, Day Return outperformed all the other return types. A rare occurrence, but it makes sense. Investors come home turn on the news, see the new daily Covid-19 case numbers, and there would be a sentiment washout on a nightly basis.
Take-Aways and Assumptions:
Bull markets don't have to favor night return over day considering earnings and economic data surprises occur before market open or after market close. There were more negative earnings surprises in the 90s and more positive earnings surprises after 2010. One would assume night return would be positive post 2010 and flat or negative in the 90s, but we see the opposite.
With the exception of 2020, Night Return holds up best during times of heightened volatility and strong drawdowns (Tech Bubble Bursting and GFC).
Night Return exhibits less volatility over all time periods observed and since inception.
This post researches 3 unique decades, the 90s, the lost decade, and the post GFC bull market. Each shows unique trends. This makes making a broad assumption difficult because it makes a sample size of roughly 30 years too small.
Having now looked at different time periods, "Stocks work better at night" in my opinion is a skewed statement which should be taken with a grain of salt. If you start since SPY's inception it holds true because of your volatile 2 decades buffering the return and allowing you to compound. Maybe 20 years from now starting in 2010 where Night and Day Return are low and roughly the same, and comparing the 2 30 year periods or the 60 year period as a whole would give a better answer. For now we only know what we know.
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