Turn of the Month Effect Persists with Stock Price Movements

The Wall Street Journal notes that the “turn of the month effect” continues. In 1988, economists showed that the Dow Jones Industrial Average tended to do better from the final trading day of the month through the next three days than it did at other times of the month. A recent paper by Erkko Etula et al. shows that the effect persists, and not only in the U.S. The effect seems to occur because many retirement funds sell stocks at the end of the month to cover withdrawals, then buy stocks toward the beginning of the month as investors reinvest. It is more pronounced among stocks widely held by mutual funds and among larger and more liquid stocks. A portfolio that held U.S. stocks for only 7 days around the turn of the month since 1926 would have done as well as one holding them consistently, according to Etula’s paper, and had a lot less volatility.