The Mystery of Late Night Stock Returns

Welcome back to?We Study Markets!

It's hump day in the doldrums of summer - things should be pretty uneventful right now. While we'd like to be sitting by the pool sipping a cold drink, there's a lot going on in the world???

Stocks seemingly rallied in relief yesterday after Nancy Pelosi arrived safely in Taiwan, only to move down as the weight of escalating geopolitical tensions settled in.?

But one stock had an amazing day: Uber. Despite reporting negative earnings, investors were quite pleased with the company's first quarter of positive free cash flow.?

More on Uber in our In The News section below.

*Equities as of 4pm EST on prior day's close, Bitcoin, bond, and oil prices as of this morning

Today, we'll discuss the conundrum behind nighttime stock returns, government efforts to combat inflation, layoffs at Robinhood, and bits of wisdom from legendary investor Ed Thorpe.

All this, and more, in just?5?minutes to read.

?Let's get started!????

?IN THE NEWS

???Will The Inflation Reduction Act Actually Fight Inflation? (CNN)

?Explained:?

• In a surprise turn of events, U.S. Senator Joe Manchin pivoted on his previous stance and agreed to support a new bill called the Inflation Reduction Act born of 2022 out of Biden's Build Back Better initiative.?Early economic models?indicate, though, that the plan will have almost zero real effect on inflation. No more than a few hundredths of a percent each year for the Consumer Price Index (CPI) is expected.

What to know:?

• The legislation's name may be more political fluff than anything, but it's expected to raise nearly $750 billion in new taxes in coming years through higher taxes on individuals and corporations that Moody's analytics say, "will nudge the economy and inflation in the right direction, while meaningfully addressing climate change and reducing the government's budget deficits."
• Perhaps the most important thing here is not that the bill fails to materially reduce inflation, but rather, that it signals?possible inflationary relief psychologically. For years, the Federal Reserve has spoken about the power of inflation expectations as a policy tool, for our collective expectations shape our actions and economic outcomes.
• In reality, most will never read the details of this legislation or the studies that defy its name, but its symbolic passing may alter their subconscious fears about inflation. Maybe we are just optimists though...

????Robinhood Cutting 23% of Staff (CNBC)?

?

Explained:?

• Robinhood CEO Vlad Tenev said yesterday the company will reduce its staff by 23%, with cuts primarily coming from marketing, operations, and program management. The company had previously laid off 9% of its workforce in April.?
• Tenev blamed "the deterioration of the macro environment, with inflation at 40-year highs accompanied by a broad crypto market crash."

What to know:?

• Monthly active users declined along with assets under custody. Net revenue of $318 million in the second quarter was well below the $565 million reported in the second quarter of 2021. The stock, which went public at $38 per share, has traded as high as $85 per share. It closed at $9.23 on Tuesday. The pandemic boom in retail trading appears to be losing some steam.
• The company faces further hurdles. Along with a $30 million fine on Robinhood's trading unit for alleged violations of anti-money-laundering and cybersecurity regulations, the company is also coming under scrutiny from the Securities and Exchange Commission for its practice of payment for order flow where customer trades are funneled to third-party market makers to settle.?

????Uber's Shares Surge (CNBC)?

Explained:?

• ?Uber reported a net loss of $2.6 billion, but investors liked the news that the company had posted $382 million in free cash flow for the first time ever and doubled quarterly revenue. Shares advanced 19% on Tuesday.
• 70% of new drivers said inflation played a large part in their decision to join the platform. CEO Dara Khosrowshahi stated, "against the backdrop of elevated gas prices globally, this is a resounding endorsement of the value drivers continue to see in Uber." New changes have been made to attract and keep drivers who will be able to choose the trips they want and see how much they'll earn before they accept a trip.

What to know:?

• $1.7 billion of the total loss was attributed to investments and a revaluation of stakes in Aurora, Grab, and Zomata.
• 1.87 billion trips were made on the platform last quarter, which is up 24% year over year. There are 122 million monthly active platform consumers, which is up 21% year over year.

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DIVE DEEPER: IS IT BETTER TO INVEST AT NIGHT?

What if we told you that the majority of the returns on stocks over time actually happen at night, would you believe us?

While most of us expect stock trading to occur during the normal hours of 9:30am-4pm EST for the New York Stock Exchange, the lower volume and more informal hours of aftermarket trading have spawned the most persistent positive returns.

Through the first quarter of this year, a Russell 2000 ETF proxy (ticker: IWM) had a cumulative 262% return since 2012 during nighttime hours, yet the fund lost 26% during only official U.S. daytime trading hours.?

This is by no means a minuscule technical discrepancy;?it's a striking and well-known gap in performance.

The phenomenon isn't new?either, as it has puzzled academics and investors alike for years, who have also noticed that stocks tend to trade more negatively in the morning.?

The pattern isn't just confined to U.S. markets though,?it's surprisingly pervasive internationally.

So, are investors just more optimistic at night? Or does it takes a few hours for the morning coffee to set in before everyone gets into a buying mood?

Probably not, but the trend is certainly perplexing.

One theory is that the whole thing is a massive conspiracy amongst hedge funds to manipulate markets. While collusion of this scale isn't realistic, it's possible that hedge funds and other market participants find it more favorable to aggressively purchase shares in stocks they already own during periods of reduced liquidity at night when the rest of the world is sleeping.

This would serve to drive prices up more than usual in off-hours leading into the next day, and then would enable these traders to sell their positions over the course of the morning as greater liquidity becomes available.

More realistically, the nighttime stock gains phenomenon is related to the simple fact that most companies report earnings after normal market trading is closed.

Since earnings have grown consistently over the years and on average have beaten historical expectations, it's quite logical then that shares would react favorably to these positive news releases at night.

Because trading at these late hours is less efficient due to fewer participants, in aggregate, the morning decline in share prices reflects that markets are effectively moderating initial enthusiasms.?

So What?

For the first time, there's an?investment product available?to everyday investors that seeks to exploit the seeming advantages of nocturnal markets trading. The NightShares 500 ETF (NSPY) aims to capture the after-hours?performance of the largest stocks in the U.S.?To be clear, we aren't recommending this ETF, but readers may be interested to learn more about it.

The strategy is built around buying stocks at the close of each day, and then selling them at the open of the following day's normal trading hours. To do this, the fund uses index futures, while keeping its assets in cash and Treasuries during the day to earn interest that can be used to reduce trading costs. At a 0.55% expense ratio, the fund isn't cheap, but given its unique approach and niche strategy, it's not terribly expensive either.?

This is more suited as a tactical trading fund that speculators could use to bet that markets will recover the next day if they close down in the afternoon. After fees, we suspect that in reality, the ETF will not significantly outperform, but we'll be curious to watch it.

Let us know, would you want to own an ETF like NSPY to benefit from trading during non-traditional hours? And what do you think are the causes of this phenomenon? (Just hit reply to this email)

P.S. If you enjoy our newsletters, you'll love our industry-leading podcasts like?We Study Billionaires,?Bitcoin Fundamentals, and?Richer, Wiser, Happier, you can subscribe to listen to our entire catalog of these shows and episodes, without ads, through?Apple Podcasts?for just $2.99/month.?

QUOTE OF THE DAY

"Do what you love and the money may follow. And if it does, that’s fine. If it doesn’t, you’re still doing what you love.”

- Edward Thorpe

The investing world is filled with fascinating characters full of colorful stories about how they made their fortune. One of our favorites is Edward Thorpe, featured in?We Study Billionaires episode 128.?Ed is an investing and mathematical legend who was a professor at MIT, a blackjack player that got chased out of Las Vegas, and a highly successful hedge fund manager.?

He wrote a book called?Beat the Dealer?in 1962, which is a blackjack classic, to mathematically prove that the house advantage could be overcome by card counting. He also wrote his autobiography called?A Man for All Markets,?which is a fascinating read recounting the 89-year-old's life story.?

We recently listened to Edward on the?Tim Ferris podcast, and the interview's last ten minutes are a must-listen. He describes how he found his way into the investing world by being curious and following his interests. He was gifted mathematically, so that helped, but he never intended to get wealthy. He just wanted to apply his mathematical theories, first to blackjack, and then to investments.

?He explained he had a former sister-in-law that wrote a book called?Do What You Love and the Money Will Follow.?He modified it slightly and said the money?may?follow. His goal, ultimately, was to have a good life, enjoy himself, and have fun. The wealth came, but it was a byproduct of being true to himself and following his interests and passions.

?Do you agree with Ed's philosophy of doing what you love? Or are following your passions a sure-fire way of ending up in the poor house living off ramen?

Hit reply and let us know!

SEE YOU NEXT TIME!

That's it for today on?We Study Markets!?

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