Equity Returns at the Turn of the Month

It has been nearly 20 years since Wei Xu and John McConnell published the influential paper, Equity Returns at the Turn of the Month (July 2006). These researchers boldly claimed, “we find that the turn-of-the-month effect persists over the recent interval of 1987-2005: in essence, over this 19-year period (and over the 109-year period of 1897-2005) all of the excess market return occurred during the four-day turn-of-the-month interval. Thus, during the other 16 trading days of the month, on average, investors received no reward for bearing market risk.”

If they were to have made such a claim at the beginning of 2026, the claims would be dismissed as nonsensical and perhaps even heretical. The past two years could hardly have shown a more dramatically opposite result.

Many rationalizations of this well-known effect have been published, with the most recent suggesting the answer had to do with investor bias, rather than market structure or simple supply and demand. Investor bias may be a worthwhile key to interpreting market price behavior around the end of each month. However, I wonder if researchers have overlooked a key driver of price: the Nonfarm Payroll Report.

Sponsor Message From Author, Gordon Scott, CMT:

The Nonfarm Payroll Report

It is possible that the building trend of AI influence in the workplace and society has begun its erosive influence on the workforce. It is unlikely that AI will truly displace the need for a human workforce (those prompts won’t type themselves), but it is very likely that resource redistribution has occurred already and will continue to do so. Consider these two charts as evidence.

The Nonfarm Payroll report just released followed a years long trend of declining new jobs. This isn’t just window dressing. For now it represents actual job loss as revealed by the rising tide of unemployment.

While most investors are naturally focused on parsing what the President had to say last night, and watching the price of oil futures, perhaps the more important trend will be whether or not the ongoing increase of functionality available in large language models will generate enough opportunity elsewhere for those displaced in the labor market.

The AI Race

If the strong performance of the market over the past two years is anything more than blind hope in the productivity gains behind AI, then it would be quite likely that we will soon see gains in many areas of industry this year. With that in mind, which is the best horse in the race?

The two companies that represent the two leading solutions for AI implementation are Nvidia and Alphabet. Hardware and software respectively, these two companies lead the race for AI mindshare among investors. But the chart above shows one clearly gaining separation from the other. If and when the market is satisfied that oil will consistently make it out of the Strait of Hormuz, the AI race will be back on in full and GOOGL will clearly have the inside track in this contest. Keep an eye on how both companies fare in the final session before the three-day market break this weekend.

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