The FTSE 100/S&P 500 monthly switching strategy

Although since 1984 the S&P 500 has overall greatly out-performed the FTSE 100 (+1021% against +575%), there are months in the year when the FTSE 100 fairly consistently out-performs the S&P 500.

The following chart shows the monthly out-performance of the FTSE 100 Index over the S&P 500 Index since 1984.

Comparative average monthly returns of FTSE 100 v S&P 500 [1984-2014]Looking first at the orange grey bars in the chart, this shows, for example, that on average in January the FTSE 100 has out-performed the S&P 500 by -0.6 percentage points (i.e. the UK index has under-performed the US index in that month). From the chart we can see that the five months that are relatively strong for the FTSE 100 are: February, April, July, August and December. For example, the FTSE 100 has out-performed the S&P 500 in February in 13 of the past 15 years.

Now, turning to the bown bars, these display the same average monthly out-performance of the FTSE 100 over the S&P 500, except this time the S&P 500 Index has been sterling-adjusted. One effect of adjusting for currency moves is to amplify the out-performance of the FTSE 100 index in certain months (April, July, and December). Conversely, the FTSE 100 under-performance is amplified in January, May and November.

Whereas, before, the relatively strong FTSE 100 months were February, April, July, August and December, we can see that the currency-adjusted strong months are just April, July, and December.

The FTSE 100/S&P 500 monthly switching strategy (FSMSP)

The above results suggest a strategy of investing in the U.K. market (i.e. the FTSE 100 Index) in the months April, July and December and in the U.S. market (i.e. the S&P 500 Index) for the rest of the year. In other words, the portfolio would be invested in the S&P 500 from January to March, at the end of March it switches out of the S&P500 into the FTSE 100 for one month, then back into the S&P 500 for two months, into the FTSE 100 for July, back into the S&P 500 for four months, then back into the FTSE 100 for December, and finally back into the S&P 500 to start the next year.

The following chart shows the result of operating such a strategy from 2000. For comparison, the chart also includes the portfolio returns from continuous investments in the FTSE 100 and S&P 500.

FTSE 100-S&P 500 monthly switching strategy [2000-2014]The final result: the FTSE 100 portfolio would have grown 7%, the S&P 500(£) risen 32%, but the FTSE 100/S&P 500 monthly switching portfolio (FSMSP) would have increased 114%. Switching six times a year would have incurred some commission costs, but these would not have dented performance significantly.


UK Stock Market Almanac cover [160 x 240]The above is an extract from the newly published UK Stock Market Almanac 2015.

Order your copy now!

 

Social Share Toolbar

Monthly seasonality of GBPEUR

The euro was introduced as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. On 1 January 2002, physical euro coins and banknotes entered into circulation.

The following chart plots the GBPEUR exchange rate from 1975. (NB. The GBPEUR rate has been back-calculated to 1975.)

GB sterling-Euro (GBPEUR) rate [1975-2014] 2The month closing high for the rate was 1.9234 in January 1981; and the month closing low was 1.0341 in December 2008.

Monthly seasonality

The following charts look at the monthly fluctuations in GBPEUR.

The chart below shows the average monthly returns for GBPEUR for the period 1975-2014. For example, on average the rate has risen 0.80% in January.

GBPEUR monthly average return [1975-2014]From the above chart it can be seen that since 1975 the strongest month for GBPEUR has been January, followed by April and July. Whereas the weakest month has been September (-1.05%), followed by February and December.

To see if there has been any change to this monthly seasonality since 1999 (i.e. since the euro was introduced as an accounting currency), the following chart plots the average monthly rate changes in GBPEUR for the period 1999-2014.

GBPEUR monthly average return [1999-2014]For this shorter period, it can be seen that January (+1.20%) is still the strongest month followed by, still, April and July (although April has been stronger and July weaker since 1999). On the other side, December (-1.25%) has become the weakest month (September has had close to a zero average change since 1999), with the other week months being November and February.

The following chart plots the proportion of positive returns for GBPEUR for each of the 12 months.

GBPEUR monthly positive return [1999-2014]The observations here largely correlate with those for the average changes. Namely, since 1999-

  • The two strongest months for GBPEUR have been: January and April,
  • The three weakest months for GBP have been: February, November, December.
Social Share Toolbar

Market fall 8-12 December 2014

Last week the FTSE 100 Index fell 442 points (-6.6%), losing £121bn in market capitalisation. It was the largest weekly fall since August 2011, and the 14th largest weekly fall ever for the FTSE 100 Index (created in 1984).

The following chart shows the 10 FTSE 100 stocks that fell the most last week.

FTSE 100 fall 8-12 Dec 2014 [by price]

Petrofac shares were down 12.9% last week, the largest faller, followed by Tesco (-12.6%).

The following chart shows the 10 stocks that saw the greatest absolute falls in market capitalisation – i.e. these were the stock that had the greatest impact on the FTSE 100 Index. The chart shows the proportion of the 442 point fall in the FTSE 100 Index that was attributable to each stock. For example, 10.3% (46 points) of the FTSE’s fall last week was due to the fall of the share price of Shell.

FTSE 100 fall 8-12 Dec 2014 [by mkt cap]

The above 10 companies accounted for 47% of the FTSE 100 fall.

The following table shows the three sectors that were most responsible for the FTSE 100 fall last week.

Sector MktCap lost (£m)
Oil & Gas 22,820
Banks 17,227
Mining 12,029

 

Social Share Toolbar

Correlation of UK and international stock markets

The following charts show the correlation of monthly returns between the FTSE All-Share index and six international indices for the period 2000-2014.

 


 

Correlation of FTSE All-Share Index and DAX [2014]


Correlation of FTSE All-Share Index and CAC40 [2014]


 

Correlation of FTSE All-Share Index and Nikkei 225 [2014]


 

Correlation of FTSE All-Share Index and Hang Seng [2014]


 

Correlation of FTSE All-Share Index and All Ordinaries [2014]


 

Correlation of FTSE All-Share Index and Bovespa [2014]


Analysis

The first observation is that all the markets are positively correlated with the UK market.

The next question is how closely correlated are they?

The following table summarises the R2 values for the correlation between the FTSE All-Share Index and the six international indices; the equivalent values are also given for the previous year. The higher the R2 figure the closer the correlation (R-Squared is a measure of correlation – in effect, how close the points are to the line of best fit).

Index R2 R2 (2013)
CAC40 0.78 0.79
DAX 0.69 0.70
All Ordinaries 0.61 0.62
Hang Seng 0.48 0.49
Bovespa 0.45 0.47
Nikkei 225 0.37 0.39

By visual inspection it can be seen that in the charts of CAC40 and DAX the points are more closely distributed around the line of best fit. This is confirmed in the table where it can be seen these two markets have the highest R2 values with the FTSE All-Share (the CAC40 value of 0.78 is now higher than that of 0.76 for the S&P 500). The index with the lowest correlation with the UK market (in the sample) is the Nikkei.

The practical impact of this is that if a UK investor is looking to internationally diversify a portfolio they would do better by investing in markets at the bottom of the table (low R2) than at the top. And the good news for investors looking for diversification is that the correlation between the UK market and all the international markets in this study has fallen in the past year.

See also correlation between the US and US stock markets.


UK Stock Market Almanac cover [160 x 240]The above is an extract from the newly published UK Stock Market Almanac 2015.

Order your copy now!

 

 

 

 

Social Share Toolbar

The UK Almanac Calendar

The UK Almanac maintains a calendar of important market dates. The calendar can be viewed on the UK Almanac web site here, or synced with your own online calendar (see below).

Add the above calendar to your own Android, iPhone or online calendar:

html button

Social Share Toolbar

The Santa Rally

The average return of the FTSE 100 Index on the first trading day of December since 1984 is -0.04%. We can also calculate the average return of the FTSE 100 Index on the second trading day of December – this happens to be 0.03%. We can continue this process until we have calculated the average return for the Index on each trading day of December since 1984.

With these average daily returns, we can calculate a theoretical average FTSE 100 Index for the month of December. If this theoretical index starts at 100 then the index will have a value of 99.96 on the first day (after a fall of 0.04%), and 99.99 on the second day.

The following chart plots the values of this theoretical average FTSE 100 index calculated from the average daily returns for December.

Average month chart - December (2014)Starting at 100 the theoretical index ends the month at 102.5 – reflecting the fact that the average return for the FTSE 100 Index for the whole month of December is 2.5%.

One of the most remarkable features of this chart (and in fact for the whole year) is the strong performance of the market from the middle of the month. This surge in equities has been termed the Santa Rally (or the Christmas Rally).

From the above chart it can be seen that on average the Santa Rally starts on the 10th trading day of the month.

Santa Rally [2014] In the year 2014, the 10th trading day is the 12th December.

 

Social Share Toolbar

FTSE 100 companies and their all-time highs

The chart below shows the extent to which the 100 stocks in the FTSE 100 Index are below their all-time highs (ATH). For example, RBS is currently 94% below its ATH, while Ashtead is 0% below its ATH (as it is currently at its ATH).

In the chart the stocks are ordered by the time since they hit their ATH. For example, IAG hit its ATH 14 years ago (the longest time for any FTSE stock). Persimmon, Dixons Carphone and Ashtead are at the bottom of the chart as they are all currently at their ATHs.

FTSE 100 all-time highs [2014]BAE Systems is only 12% below its ATH, but ranks high in the chart because its ATH is a long time ago, in 1998.

Weir is currently 35% below its ATH, but is placed relatively low in the chart because its ATH was fairly recently in September 2014.

A few further observations:

  • Three FTSE 100 stocks are currently at their all-time share price highs: Persimmmon [PSN], Dixons Carphone [DC.], Ashtead [AHT]
  • 14 stocks in the FTSE 100 Index have hit their all-time highs in the last two weeks.
  • Eight stocks in the FTSE 100 Index hit their all-time highs in the last millennium: IAG, RSA, AV., LLOY, BA., GSK, KGF, BT.A
  • 20 FTSE 100 stocks are currently more than 50% below their all-time highs.
  • 37 FTSE 100 stocks are currently less than 10% below their all-time highs.

 

Social Share Toolbar

Top Ten Podcasts

Apparently, podcasts are coming back into fashion. Below is a list of the UK Almanac’s ten favourite podcasts.

Podcast icon_Planet Money 1. Planet Money

The crack cocaine of podcasts – seriously addictive. Good example is their T-Shirt project where they follow the production journey of a simple T-shirt (inspird by the fantastic book The Travels of a T-Shirt in the Global Economy by Pietra Rivoli).
 Podcast icon_StartUp 2. Startup

An absorbingly fresh view on the process of starting a company (which also happens to be a podcast company – wonderful circularity!) A good example is the episode where the company founders look for a name for the new company – should be easy, no?
 Podcast icon_Freakonomics 3. Freakonomics

Spin-off from the famous book – economics for non-economists. Typical episode: How Can Tiny Norway Afford to Buy So Many Teslas?
 Podcast icon_More or Less 4. More or Less

Statistical fact-checking programme presented by the excellent Tim Harford
 Podcast icon_TED Radio Hour 5. TED Radio Hour

A clever idea to package several TEDTalks into one hour-long show focusing on one topic. Typical episode: Predicting The Future.
 Podcast icon_Peter Day's World of Business 6. Peter Day’s World of Business

Old-style reportage, but probably the best business programme on radio. Presented by Peter Day, whose decades of experience helps puts each topic in context.
 Podcast icon_EconTalk 7. EconTalk

A series of hour-long interviews with people ranging from small business owners to Nobel economics laureates. Typical episode: interview with Robert Solow on growth theory and the challenges of macroeconomics.
 Podcast icon_In Our Time 8. In Our Time

One of the most eclectic programmes on radio; recent pogrammes have discussed Nuclear Fusion,
The Haitian Revolution, and Euler’s number. Used to be a must-listen, but going off the boil a little now – the presenter Melvyn Bragg is as impressive as ever, the tenured university guests less so.
 Podcast icon_RadioLab 9. Radiolab

A radio programme of scientific and philosophical ideas. Typical episode: speed up learnng with a zap to the brain.
 Podcast icon_60-second Science 10. 60-second Science

Bite-sze science in just one-minute.

 

 

 

 

Social Share Toolbar

MPC meetings and the FTSE100

The Monetary Policy Committee (MPC) is a committee of the Bank England which was set up in 1997 to decide official interest rates in the UK (referred to as the Bank of England Base Rate). The MPC’s primary responsibility is to keep the Consumer Price Index (CPI) close to the Government’s inflation target (2% as of 2011) and, more recently, it also has a responsibility to support growth and employment.

Monetary policy in the UK is usually effected through the rate at which money is lent (the interest rate), but in March 2009 the MPC announced that it would also start injecting money directly into the economy by purchasing financial assets (aka quantitative easing).

The following chart plots the BoE base rate since the MPC was established in 1997 and the FTSE 100 Index. The chart goes to March 2009 – when the base rate was reduced to 0.5% and since when it has not moved.

MPC - FTSE 100 v Bank rateThe MPC monthly meetings

The MPC meets once a month to set the bank rate. The meetings take place over two days: on the Wednesday and Thursday following the first Monday of each month. This schedule might occasionally be changed, for example in May 2015 the meeting is delayed by 48 hours to avoid clashing with the General Election. The interest rate decision is announced at noon on the second day of the meeting; and the minutes of the meeting are published two weeks later (on the Wednesday of the second week after the meetings take place).

The monthly MPC announcement on interest rates was an important event; the announcement – and the anticipation of the announcement – could move the markets. However, since March 2009 the announcement has generated little interest as the rate has been set at 0.5% with little likelihood of changing in the short-term. This period of abnormally low interest rates should end at some point. In anticipation of this the following briefly analyses the historic behaviour of the  UK stock market around the time of the monthly announcements.

The following chart plots the average daily returns of the FTSE 100 Index for the three days around the MPC announcement: the day before the announcement MPC(-1), the day of the announcement MPC(0), and the day following the announcement MPC(+1). For each day, three values are plotted: the average FTSE 100 return for all days (i.e. for all the 144 MPC announcements 1997-2009), the returns on the days for the 18 times the MPC announced an increase in the bank rate, and the returns on the days for the 26 times the MPC announced a decrease in the rate.

MPC - Performance of the FTSE 100 Index for the three days around the MPC meetings [1997-2009]


 

UK Stock Market Almanac cover [160 x 240]The above is an extract from the newly published UK Stock Market Almanac 2015.

Order your copy now!

 

 

Social Share Toolbar

Average market behaviour in December (2014)

The following chart plots the average performance of the FTSE 100 Index during December since 1984.

Average month chart - December (2014)As can be seen, historically the market has traded fairly flat for the first two weeks of December and then risen very strongly in the second half of the month.

November 2014

The following chart shows the average performance of the market in November (1984-2013) and overlays the actual performance in November 2014.

Average month chart - November overlay November 2014 (2014)

Social Share Toolbar