A common concern we hear from investors is in regards to overnight risk, or the risk that negative news will break when the US market is closed. Such news can cause the market to open lower the next trading day. The US market is open daily from 8:30 am – 3:00 pm (CST). Then there is a futures market that is open all other hours. Negative news can impact prices in the futures market. The futures market does a good job predicting where prices will be the next day the US market opens.
For example, the S&P500 closes at 2900 at 3:00 pm on Thursday. Overnight, the S&P500 futures market rises to 2914. The regular S&P500 will open Friday’s trading at 2914 as a result of the gain in the futures market. Where do gains and losses in the futures market come from? From anywhere! There might have been big news in China while the US was sleeping, or President Trump may have tweeted (yes, tweeted) during the wee hours of the morning. Most common though, the futures market is reacting to economic data that is reported outside of regular market hours. Key reports on GDP and unemployment are always released before the US market is officially open, for example.
Don’t let the President’s tweets throw you off your investment plan
President Trump has brought more attention to the idea of overnight risk because of his propensity for tweeting market-moving news. For example, on Sunday, May 3, 2019, the President announced an escalation of tariffs on China. The futures market dropped 2% that Sunday night following the President’s announcement. When the regular US market opened that Monday, it was 2% lower than Friday’s close, reflecting the losses from the futures market.
Fear mongers are quick to point to examples like these as reasons for why you should avoid overnight risk. What they won’t tell you though, is these examples are few and far between. What’s far more common is that positive news breaks and the futures markets move higher. Take a look at the following chart from Bespoke:
The green line shows the S&P500’s return outside of regular trading hours, that is, the returns generated in the futures market. The red line shows the S&P500’s return during regular trading, that is from 8:30 am – 3:00 (CST). Over 600% of market returns have occurred outside of regular market hours! Meanwhile, regular market hours have actually generated a negative return (-9.8%). Put another way, anyone who has tried to avoid overnight risk has ended up with the exact opposite results of their objective. This chart shows that it’s not overnight risk we should be worried about, but rather missing out on overnight rewards!
If you are invested in the broader market through market index ETFs, your investments will participate in all of these gains. That’s why Blue Haven Capital advises our clients to leverage the market — not try to “beat” it. Staying invested is the best way to grow your money over the long-term.
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