S&P 500 Outlook:
- The average return for the July 4 holiday week since 1988 is -0.19% compared to a 1.13% gain for the month
- Holiday trading hours create prime conditions for Black Swan Events and Stock Market Crashes
- Thus, the SKEW Index has ticked higher and the week drags on
S&P 500 Outlook: Historical Returns for the 4th of July Holiday Week
Monday saw the S&P 500 close at a new all-time high following a trade war truce established over the weekend in Osaka, Japan. Optimism was abound, evidenced by the widespread demand for various risk assets and pain in the more-traditional safe haven assets. But Tuesday trading revealed that considerations remain as the S&P 500 slid lower. Still, the strong start to the holiday week is an encouraging first sign for the third quarter.
On average, the week of July 4th has seen the S&P 500 slide -0.19% since 1988. While past performance is not indicative of future results – particularly over a span of a few trading days – the holiday week does offer unique trading conditions. As with most national holidays, reduced market-hours and increased vacationing among traders results in lower liquidity – a phenomenon that can increase the potential for a Black Swan event.
The market’s concern for those events are evidenced by a moderate rise in the SKEW Index, which seeks to measure the likelihood of a tail-risk event – admittedly an exceptionally difficult task. Simultaneously, the VIX is trending nearer to the 13 level – a sign that investors have grown complacent despite the liquidity drain ahead.
S&P 500 Price Chart Overlaid with VIX and SKEW Indices
That said, according to the historical performance of the weeks ahead, the outlook for post-Independence Day trading is generally optimistic. In the last 30 years, the S&P 500 has offered an average return of 1.13% in July – compared to a monthly average of 0.74%. On the other hand, and while correlation is not causation, the S&P 500 ended July higher 30% of the time when the week of July 4th posted a positive return. Still, the holiday week has come amid wildly diverse market conditions and at different stages in the business cycle.
With that in mind, it would be imprudent to ignore the current fundamental themes when looking to forecast S&P 500 performance. With the US-China trade talks in the rearview, market focus will shift to Friday’s Non-Farm Payroll data which could result in heightened market impact given the conditions and weigh of the data. Sign up for the live webinar of the NFP data release to see the market’s reaction in real-time. In the meantime, follow @PeterHanksFX for commentary on a variety of assets.
–Written by Peter Hanks, Junior Analyst for DailyFX.com
Contact and follow Peter on Twitter @PeterHanksFX