Leap Day might seem like fun and games — until you consider Wall Street.
The reason leap years exist is because it actually takes the Earth around 365.24 days to orbit the Sun, meaning the typical calendar year of 365 days is off by around a quarter of a day a year. To account for that gap, Julius Caesar in 45 BC decreed that an extra day be added every four years, leading to the Julian calendar.
Pope Gregory XIII in 1582 AD created the Gregorian calendar, coined the term "leap year" and established February 29 as the official leap day. A leap year thus occurs in every year that is divisible by four, but only in century years that are evenly divided by 400, to keep our calendar in alignment with Earth's rotation around the Sun.
But does that impact financial markets? There are small but notable implications for the bond market and corporate earnings, according to Matt Weller, head of market research at FOREX.com and City Index.
The extra day can lead to a slight increase on the return for bonds whose interest is calculated based on the number of days in a year, since a leap year tacks on an extra day of interest. While that change is slight, it can impact bond pricing in interest-rate sensitive markets, says Weller.
He adds that a leap day can also help marginally raise corporate earnings, since companies get an extra day in a fiscal quarter to operate.
Are there any trends in how stocks perform during leap years? History shows that stocks tend to perform worse when an additional day is added to the calendar. The S&P 500 total return index has averaged a 10.8% gain during leap years versus a 12.8% jump during non-leap years, according to S&P Dow Jones Indices data going back to 1971.
The S&P 500 index has averaged a roughly 0.1% decline on February 29 and a positive trading session just a third of the time, compared to the rest of the month, which averages a 0.03% gain and is positive about 52% of the time, according to S&P Dow Jones Indices data going back to 1928.
While the stock rally has stalled somewhat this week, the S&P 500 is on pace to gain about 4.6% in February and is up about 6.3% for the year after notching several record highs.
"Bulls may want to exercise caution, especially after US indices' strong performance over the last month (and indeed last four months)," wrote Weller in a Tuesday note.
Of course, correlation doesn't equal causation. Notably, leap years tend to correspond with US presidential election years. While the uncertainty surrounding the election can cause some shakiness on Wall Street, stocks tend to rise during election years. That's because presidents and the political party in power tend to prioritize fostering a strong economy and stock market to tout on the campaign trail, according to Yardeni Research.
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