by Bespoke Investment Group
While most people are aware of the fact that the S&P 500 has had a tendency to rise on the first trading day of the month, the reason for this trend is up for debate. This morning's WSJ discussed the phenomenon and attributed the strength in the market to stronger than expected monthly ISM Manufacturing reports, which are always released on the first trading day of the month. Although this argument sounds logical, the facts simply don't bear it out.
In the table below, we highlight the results of the monthly ISM Manufacturing report since the start of 2010. As shown, the report has routinely exceeded forecasts, with only three negative surprises since the start of 2010. At first glance, the argument that the equity market's strength is due to strong economic data seems to make sense.
Digging a little deeper shows a disconnect, however. On the right side of the table below, we highlight the S&P 500's performance on the first trading of the month broken out by pre-ISM returns and post-ISM returns. Since the ISM Manufacturing report is typically released at 10:00 AM ET, we broke out the performance of the S&P 500 from the prior close to 9:59 AM and then from 9:59 AM through the close.
As shown in the table, the S&P 500 has averaged a gain of 0.80% prior to the release of the monthly ISM Manufacturing report and then a return of 0.24% post ISM. Furthermore, there have only been two ISM days since the start of 2010 that the S&P 500 did better from 10 AM through the close than it did during the opening half hour. Based on these results, it's hard to argue that strong economic data is behind the equity market's strength when more than three quarters of the average gain on the first trading day of the month is coming before the release of the data!
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