Why do most of the stock market's gains occur overnight? It has an overall loss during the daytime

Question

I saw a tweet from the Chief Investment Strategist of Charles Schwab that said the following:

Since 1993 from @bespokeinvest :

Buying SPY at open & selling at close every day (ie, only holding it during trading day): -13.9% return

Buying SPY at close & selling at next open (ie, only holding it after-hours): +634.2%

It included the following graphic:

Why has the S&P 500 generated such a massive gain since 1993 during the overnight hours (4pm to 9:30am), and has an overall loss during normal trading hours (9:30am to 4pm)?

Answer 1

A couple of possible reasons:

1. A disproportionate amount of stock-market risk (e.g., scheduled economic and earnings releases) happens outside market hours, with the goal of avoiding destabilization of the market. (Extended-hours and futures trading are typically occurring, and show the immediate impact, but the regular-hours SPY does not.) Thus, overnight returns should be commensurate with the risk.

2. Interest (either on positive cash balances or on margin debt) is calculated daily on overnight balances regardless of intraday fluctuations. Thus, day trades have zero cost of capital and their return is lower to compensate.

I once read a suggestion that a countervailing mechanism explains the suppression of this tendency in parts of the 1990s (i.e., somewhat weaker overnight and stronger intraday returns): As Japan endured an extended bubble-deflating bear market, US morning futures and opening markets were often depressed in sympathy with the overnight Nikkei but then rebounded during the trading hours of bullish US investors.

Answer 2

Per the request above:

The market reacts to overnight news which includes after hours earnings announcements, economic reports, overseas trading, etc. (very, very few companies announce earnings during regular hours trading). Because of these, the market tends to gap up or down in the morning. In a long term bull market, those gaps are net positive

Answer 3

The following items could play a factor:

1. Intraday margin is higher (e.g. 4x leverage for intraday but 2 x for overnight), causing people to buy at the open (push the price up) and sell at the close (push the price down). While people could also use intraday margin to create short positions, in general there are more long buyers than short sellers.

2. Many investors are afraid of 'gaps'. For example that the market 'gaps up' or 'gaps down' between the close and the open, so may want to close out their positions at the end of the day to avoid those risks.

3. Many of the great crashes have occurred intra-day.

4. By employing this strategy over 26 years you are only gaining 20% greater return overall - that is less than 0.7% better per year on average. This kind of improvement could be eaten by bid-ask spreads and transaction costs at the close and the open. It is not clear what methodology was used to determine the prices. If the midpoint was used, that would not take into account transaction spreads.