When the stock market rallies at the end of the month, a universal chorus of complaints arises among the short-sellers and underinvested. But if the month-end positive market is nothing more than a recurring phenomenon, which it appears to be, and history is telling us to expect these market inflows, what is the point of this habitual complaining?
I have data going back for 60 years on the
and for a lesser period of time on indices such as the Russell 2000, S&P MidCap 400 and Nasdaq 100. For each, there is a historical bias to rise during the last few days of one month and the first few days of the next.
There is a natural long-term bias to the markets: They rise. This might come as a shock to perma-bears. On average, the S&P 500 rises about 8% per year, with an average daily increase of just over 0.03% per day. Not all days are positive, of course, so the positive ones will on average see a rise of more than 0.03%. Positive days will also, in the long run, outnumber negative days. And they tend to cluster in a period just before and after a new month begins.
Money flows into and out of markets have very different footprints. When money flows into markets, it does so incrementally. There isn't a rush to buy stocks or invest. In fact, the only rush tends to be to cover short positions, but that is the work of shorts, not long-term investors.
Cash flows into markets are deployed in a piecemeal fashion. For example, at the end of the month, payroll deductions for savings and retirement plans are accumulated and invested by money managers. Some money managers may anticipate these investment flows and use existing cash to buy before their competitors do so with similar incremental investment dollars. Others may wait till the cash hits the accounts or perhaps do a bit of both -- immediately before and after the month's end.
There is a huge amount of money being put to work at the end and beginning of a month. Let's do a back-of-the-napkin calculation using TIAA-CREF. TIAA-CREF manages retirement plans for teachers throughout the country. Say, for the sake of this example, that 5 million teachers, university faculty or administrators are enrolled with TIAA-CREF, and each earns $50,000 per year and has 3% of his or her salary deferred on a monthly basis, along with an equal 3% employer match. That would mean that $1.25 billion would flow to TIAA-CREF at the end of every month. This incremental investment would be put to work immediately in advance of the receipt by TIAA-CREF from existing cash on hand, immediately upon receipt or over a course of a few days after the month end.
Of course, TIAA-CREF is not the only investment manager administering such plans, and there are far more than 5 million people enrolled in such plans. There are other types of plans or accounts with automatic investing services, as well. Thus, there are billions of dollars that are being put to work at the end and beginning of a month. Of course, not all of this money is targeted to invest in stocks, but nevertheless, the magnitude of funds targeted for stocks on a monthly basis is enormous.
On the other hand, when money exits markets, it does so en masse and in high volumes. Such market liquidations tend to be concentrated in short periods of time without regard to specific timing. 2008 was an example of a market in mass liquidation.
So in the future, rather than confuse a normally recurring condition of the market with some sinister plot by money managers to run up prices, consider what I have just outlined. You may want to take my advice one step further and capitalize on this natural monthly market phenomenon.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
. Scott appreciates your feedback;
to send him an email.