One thing happened in 2020 that has been pretty typical for most of the last 25 years. The major gains in the market happened outside of regular trading hours, including all of the gains since the March bottom. See the chart below:
This may seem unbelievable at first glance. But we shared a similar chart a coupe of years ago from Bespoke that showed this has been the trend for years now! (Chart below from June 2019):
The bottom line is that the futures market drives the majority of the market’s gains, and it’s been that way for over 25 years! This is a big benefit to buy and hold investing and one of the reasons day trading is so hard.
How does it work like this?
The futures market serves a very important purpose to the market as a whole. The liquidity in the futures market allows for markets to trade more efficiently when they open during the day. Consider that most major market moving news is released outside of normal market hours. Company earnings reports, for example, are always released either before the market opens or after it closes. The futures market allows investors to express a view on the market at a time when they otherwise couldn’t.
Just recently, we received positive vaccine news from Pfizer on a Sunday night when the market was closed. The S&P 500 futures market, however, was open, and immediately reacted by moving higher on the news. These gains persisted overnight and on Monday morning, the S&P 500 opened significantly higher than the previous Friday’s closing price. This gain, while impossible to take advantage of unless you already owned the index from the week prior, was made possible due to the gains derived in the futures market.
You see, where the market closes and where it opens the next day is often two very different levels. And that’s all because of the futures market. If the last 25 years are any indication, the futures market will continue to play an important role in determining everyday market prices moving forward. Furthermore, this trend has greatly benefitted buy and hold investors who have literally had their money working for them while they sleep.
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