Will Love Be In The Air on Valentines Day?

This week includes Valentine’s Day, the day millions worldwide exchange cards, letters, candy, flowers and other gifts with the center of their affection. While many have wondered if that center is only for the feminine gender, others have imagined a different world:

Regardless, this day that commemorates the saint who, legend has it, kept secretly marrying young Roman couples even after Emperor Claudius banned marriages by men of military age because marriage, somehow, interfered with their ability to defend the empire (imagine that!), is still more honored than ignored. Some say the mid-February date was set by the Catholic Church to coincide with a pagan fertility holiday, Lupercalia. Others say it is the day in 278 AD that Saint Valentine was martyred (not the last guy to lose his head over love).

While many refer to the date as a “Hallmark Holiday,” the truth is that at least since the Middle Ages (long before Hallmark’s 1910 founding), valentines have been exchanged on this day. For example, the History Channel reports that:

The oldest known valentine still in existence today was a poem written in 1415 by Charles, Duke of Orleans, to his wife while he was imprisoned in the Tower of London following his capture at the Battle of Agincourt. … Several years later, it is believed that King Henry V hired a writer named John Lydgate to compose a valentine note to Catherine of Valois.

What has this to do with the financial markets? Well, the honest answer is that I had to fill up this space with something topical and doing a piece once again on a brewing European crisis and the looming sequester and budget battles left me cold. And believe it or not, our surveys show that many of you readers are tired of the bad news that drones on from the TV and radio 24/7. So as I get ready to fly off to Dallas for the latest National Association of Active Investment Managers meeting, we’ll give you a week off from anything too heavy.

In that vein, I find that I can tie the upcoming blitz of flowers, cards and candy to the stock market. I thought this would be easy.

Seems like every holiday someone has done a study of how stocks perform on that special day. We have the Santa Claus rally and all kinds of seasonality systems that buy on the days around the dates of national celebration. Even the Super Bowl brings with it a study that shows the propensity for stocks to drop in the year of an AFC victory (like this one – sorry to rain on your parade, Ravens fans).

Surely there must be a study of Valentine’s Day. But search as I might, I could not find a single study of the influence of this fabled day on our financial markets. I did find one in Australia that dared to show that the chances for an up or down day in their stock market were, what else, 50-50. Could it truly be that we had finally found a seasonal event that was – dare I say it – random?

Undeterred, I was determined to get to the “heart” of the matter. I pulled out my excel file of daily stock market data on the S&P 500 Index since its inception in 1930. I would generate the first seasonality study of the US stock markets “famed” Valentine Day effect (although I think “Wagner’s Valentine Day effect” has a nicer ring to it).

Here’s what I found. On the 62 trading days since 1930 in which a Valentine’s Day occurred (don’t forget, many fall on the weekend), the market on average FELL 0.11%! Stocks actually declined about 60% of the time during the 82-year period. During the five days starting with Valentine’s Day, the decline worsened to 0.27%, and for the next month (twenty trading days actually) stocks, on average, slipped 0.16%.

How could this be? A day celebrating the joy of love, the wonder of relationships, can’t lead to such a dismal stock market performance, can it? Perhaps this means that there are too few card, flower, and confectioner companies in the S&P 500? Or, a hint of scandal, are young male NYSE traders abandoning their posts mid-day to make arrangements for the big night? Is there no ray of sunshine in this quantitative study?

Of course there is. It’s just a reflection of time period studied! The first 60 years were a difficult period – a depression, a world war, the Cold War, the space race…the Lyndon Johnson years. Who had time for frivolity, for celebrations?

I went back to the spreadsheet, and it was true. In the first 62 years (1930-1992), the Valentine’s Day Massacre (nice title, eh?) grew by 63% to average a decline of 0.16% and now the negative days outnumbered the positive 65% to 35%!

Better yet, you probably already figured this out, the greater negativity in the first 62 years means that the last twenty years have seen a reversal in St. Valentine’s fortunes (no – he still does not get to keep his head). For the last twenty years, the S&P 500 has averaged a gain of 0.12% (a 100% reversal of the 82-year average) with profits 57% of the time.

And things are getting even better. For the last ten years, the S&P 500 has risen 0.40% on average on Valentine’s Day, advancing a whopping 71.43% of the time! Now, ignore the fact that for both the rest of the week and month, the S&P, reflecting the traditional mid-February swoon (see our own Political Seasonality Index chart), has been down – even over the last ten and twenty years. Valentine’s Day is now officially a winner.

There is a Cupid’s rally to challenge Santa’s! And I think it has nothing to do with the increase in the number of New York Stock Exchange traders who are young women, by the way.

It all comes down to one overwhelming fact of financial life – it’s Valentine’s Day – love must be in the air!

All the best,

Jerry

PS: On a more serious note, earnings have been the best in over two years, beating estimates by over 64% with the first 1,000 companies reporting. And revenues have beaten estimates at a 50% better rate than last quarter. Interest rates remain low but cautiously rising. Investor sentiment is surprisingly bearish, even though the market ended the week at new post-correction highs (both of which, contrarily, are good signs).

Economic reports remain the weak spot in the indicator array, as the few reports that were filed last week failed to meet the pre-announcement estimates. Trend indicators are all signaling higher prices ahead, as is our proprietary volatility analysis.

The market is a bit overbought. The new highs on Friday were not confirmed by all of the breadth and volume indicators. And as we pointed out, seasonality is weak for the next week or so