Thanksgiving Stock-Market Holiday: What Traders Need to Know

Friday, November 20, 2020 8:04 AM | Nick Dey

Markets Closed: Thursday, Nov. 26, 2020 for Thanksgiving. Closing Early:  Nov. 27, 2020 at 1 p.m. ET

Every year, the stock market closes on the fourth Thursday of November to recognize Thanksgiving Day. This year, Thanksgiving falls on Nov. 26.

On Black Friday, the day after Thanksgiving, the market opens at its regular time, 9:30 a.m. ET, but closes early at 1 p.m. ET. This session, abbreviated as it is, and stick in the middle of what would otherwise be a four-day weekend, is often characterized by low volume.

There's more to holiday season trading than just unusual hours though. There are several well-know phenomena that occur toward the end of the year.

Some of the bleakest days in stock market history have occurred on either side of Thanksgiving day, which comfortably seats itself in the middle of the holiday season. Seven of the ten worst single day moves in the history of the S&P 500 occurred between October and December. This includes the only two days that were worse than the March 16 corona-virus-driven crash; those being the infamous Black Monday of 1987 where the S&P fell by more than 20% and the start of the Great Depression on October 28, 1929 where the index fell 12.34%.

Because several big crashes have occurred during this period of time, investors should be wary this year as well as coronavirus cases continue to skyrocket and several states reapply lock-down measures.

Small-cap stocks already tend to have a rough go in the month of December, but could have an even harder month than usual this time around for a couple of reasons.

For starters, tax-loss harvesting is likely to be a big deal this year. Lots of stocks, particularly the small caps haven't recovered from the March crash. Selling those stocks before the end of the year will allow investors to offset gains they may have booked during the year on some the stocks that saw big gains. In other years, investors may have held onto some narrower losses, especially those found in mid- and large- cap stocks, in hopes that their rally is just around the corner. However, in 2020, investors are weighing a pandemic, lock-downs, lack of fiscal support, and the contested Presidential election into their trades. This could lead investors to a preference for selling for the guaranteed write-offs, rather than waiting on potential winners.

Additionally, many of the small-cap stocks, while being the ones set to benefit the most from a vaccine, are a long-ways from actually benefiting from one. Upbeat vaccine news is set to drive those markets higher, but a lack of fiscal stimulus  and further lock-downs are poised to pile-drive them right back down. This leaves the possibility open for a few negative headlines in rapid succession to spook investors into bearish activity during a season where they already have shown the tendency to be trigger-happy.

Santa Claus Rally and the January Effect:

That year-end selling can push things down for a while, but there is a counter-effect as well. People tend to buy back in after selling to keep their portfolios balanced. This can lead to the year's winners posting even more gains, and some general buoyancy  in the market at the end of the year.

The Santa Claus Rally is said to be a rally between Christmas and the first couple days of January. while the January Effect is the term for a rally for the rest of January. Both of these likely come as a result of people rebalancing portfolios and putting cash from tax-loss selling back into stocks.

All said, this holiday season will take a new form as many people will not travel and see their families. Despite 2020’s destruction of many traditional norms, the January effect - or perhaps just the December slump - may be stronger than ever with the perfect concoction of uncertainty ready to take the reigns of Holiday trading sentiment.

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