Explore Whether Stocks Perform Better at Night Than During Normal Trading Hours

Market researchers are exploring whether stocks perform better at night than during normal trading hours. The 'overnight effect' anomaly is an emerging concept

A new report by the advisory firm Elm Street has revealed that investing in US equities at night, specifically during the after-hours sessions, could yield more profit compared with investing during normal trading hours over the past several decades.

The firm’s analysis, which focused on the S&P 500 index (SPX) and took into account the time frame of 1993 to 2022, found that investors who bought into the index at the 4:00 p.m. ET market close every session and sold their holdings at 9:30 a.m. ET the next trading day over the past 30 years would have earned 100% or higher of the market’s buy-and-hold return.

This is in comparison with zero or negative returns for those who invested when markets were open. Keep in mind that these estimates don't consider transaction costs.

The report highlighted an anomaly known as the ‘overnight effect,’ which occurs as most companies report their earnings after the market closes, and the market usually reacts positively to positive earnings surprises.

The firm’s researchers stated that this would have a minimal impact on the S&P 500 as the stocks' weightings in the benchmark index are relatively small, especially over the long term.

The researchers explained that while the ominoous macroeconomic backdrop has increased the volatility of financial markets, which could be a disadvantage for short-term traders, it could also present new opportunities for those who know where to look.

"The market is pricing in good news, and it can't handle a lot of it," said the researchers, adding that this scenario ultimately leads to "a small net negative impact on the S&P 500 over the 30-year period from 1993 to 2022 for those who invest during the day."

The firm highlighted that this strategy would also require a high volume of trades, which would incur transactional charges. However, their estimates suggest that the overheads would cost the overnight portfolio roughly one percentage point.

It is also important to note that short-term trades will subject your gains to the higher short-term capital gains tax rate. So, you can avoid these implications by using the overnight effect strategy in a tax-deferred account.

Finally, the researchers advise against investors solely attempting to profit from market patterns, especially during a volatile macro backdrop. Rather, they should focus on "the true fundamentals of investing in order to maximize their returns over the long term."