'Window dressing' could explain why long-term outperforming S&P 500 Index (SPX) stocks do especially well at the end of the quarter
Each quarter, mutual funds and other institutions have to divulge their stock holdings. "Window dressing" is when portfolio managers buy outperforming stocks just before the end of the quarter so that someone looking into their holdings thinks they’ve been investing in these great stocks. Similarly, they may sell their underperforming stocks to hide the fact that they’ve invested in a losing company. This week I’m looking for quantified evidence of this shady practice, and if it does occur, we’ll look at some companies the institutions may be targeting over the next couple of weeks before the end of the quarter.
Quantifying Window Dressing: I went back to 2010 and looked at stock returns in the last two weeks of each quarter. Next, I broke down the stocks into the 50 best and worst performers over the prior six months, then all other stocks. If window dressing is prevalent, you would expect the stocks that outperformed in the prior six months to also do very well in the last two weeks of the quarter. In the same way, you would expect the worst performers over the prior six month to do poorly in the final two weeks as well.
The table below shows the results of the study, and I would say there is definitely evidence of window dressing. The stocks that did the best in the preceding six months averaged a 0.22% return in the final weeks of the quarter, with 53.5% of the stocks outperforming the S&P 500 Index (SPX). The stocks that did poorly in the prior six months averaged a loss of 0.39%, with less than half of the stocks beating the S&P 500.
Window Dressing Per Quarter: I wondered if window dressing was more obvious in certain quarters than others. The table below shows the average stock returns in the final two weeks of the quarter, broken down by the best and worst performers over the previous six months (like above), and also broken down by quarters one through four.
Looking at the data below, it seems window dressing mostly occurs in the second and third quarters. Those are the quarters where the best-performing stocks over the last six months also outperform in the final two weeks, and the worst-performing stocks continue to underperform in the last two weeks. The third quarter is particularly bad all around, with even the best performers averaging a loss -- albeit a slimmer one than the rest. In fact, since 2010, the SPX has averaged a loss of 1.9% in the last two weeks of the third quarter.
Stocks to Watch: Finally, according to the analysis above, here are some stocks that could be targets to buy or sell among big-money institutional investors.The first table shows stocks that have accelerated higher over the past six months; these would be potential buys, as they'd look pretty good in your list of holdings. The second table shows stocks that have taken a major hit in the past six months; institutions may sell these over the next couple of weeks, in fear in looking bad when they reveal their holdings.
Target Stocks: Finally, according to the analysis above, here are some stocks that could perform well over the next couple of weeks. These are stocks with at least $5 billion in market cap that have done well over the past six months. If window dressing is significant, these are stocks that portfolio managers might be targeting to add to their holdings. Their buying could result in a short-term boost for the stock.
Target Stocks: Finally, according to the analysis above, here are some stocks that could perform well over the next couple of weeks. These are stocks with at least $5 billion in market cap that have done well over the past six months. If window dressing is significant, these are stocks that portfolio managers might be targeting to add to their holdings. Their buying could result in a short-term boost for the stock.
