The Stock Market in October

We are in the market’s rock’n’roll period of the year. Stock market volatility is fairly even for the first eight months of the year. In other words, historically, from January to August the size of the daily ups and downs of the market are pretty much the same from month to month. But daily volatility starts increasing in September and peaks in October. Since 1984, average daily volatility has increased 50% in this month.

Monthly returns of FTSE All Share Index - October (1982-2013)Of course, the 1987 stock market crash greatly influences the calculation of October’s volatility and also therefore its bad reputation among investors. However, this is not strictly fair, as October is one of the stronger months of the year for the market. Since 1984 the average return for the market in October has been 0.8% (ranking it fifth of the 12 months), and over the same period the market’s return has been positive in 77% of years (second only to top month December). As can be seen in the accompanying chart, put 1987 to one side and the record looks pretty positive – the market has fallen in October in only four of the past 22 years.

But the record of October is less good outside of the UK. An academic paper of 2013 analysed 70 of the 78 operational stock markets around the world and found that October was the third weakest month of the year on average for the 70 markets. Only in Bangladesh was October found to be the strongest month.

The month is one of only two months (the other is September) that FTSE 100 stocks tend to out-perform the mid-cap FTSE 250 stocks – since 1986 the FTSE 100 Index has on average out-performed the FTSE 250 Index by 0.8 percentage points in October.

October is important as marking the end of the weak six-month period of the year (which starts with “Sell in May”). So this month investors may be looking to increase their exposure to equities anticipating the coming strong six-month period November-April; which might partly explain the last trading day of October which is the strongest last trading day of a month in the year.

In an average month for October the market tends to rise in the first two weeks, then to fall back, before a surge in prices in the last few days of the month.

Diary

Dates to watch for this month are: 3 Oct – US Nonfarm payroll report, 9 Oct – MPC interest rate announcement, 28 Oct – Two-day FOMC meeting starts.


Article first appeared in Money Observer

Further articles on October.

Social Share Toolbar

First trading day of October

Tomorrow will be the first trading day (FTD) of October.

Since 1984, the FTSE 100 Index has risen on average 0.19% on the October FTD. The index has had a positive return on this day in 60% of years since 1984.

The following chart shows the returns for every October FTD since 1984.

First trading day of October (1984-2013) [2014]

Social Share Toolbar

Last trading day of September

Tomorrow will be the last trading day (LTD) of September.

Since 1984 the market has on average fallen 0.07% on the LTD of September, which makes it the second weakest LTD of the year. And returns have been positive in September since 1984 in only 43% of years.

Since 2000 the average change on the September LTD has been even weaker at -0.38%, the market has only risen three times in the last 14 years on the this day, making it the weakest LTD of all.

The following chart shows the FTSE 100 Index returns for every September LTD since 1984.

Last trading day of September (1984-2013) [2014]

Social Share Toolbar

Shares that like/dislike October

Shares that like October

The following table lists the four FTSE 350 shares that have the best returns in October over the last ten years. For example, Tate & Lyle has an average return of 6.1% for the month of October. Each stock has risen in October in nine of the past ten years, while Diageo is the only FTSE 350 stock to have risen in every October for the past ten years.

Company TIDM Avg(%)
Tate & Lyle 6.1
Marks & Spencer Group 5.2
Restaurant Group (The) 3.9
Diageo 3.0

Shares that dislike October

The following table lists the three FTSE 350 shares that have the worst returns in October over the last ten years. For example, William Hill has an average return of -4.4% for the month of October. All four stocks have fallen in October in at least eight of the past yen years.

Company TIDM Avg(%)
William Hill -4.4
Tullett Prebon -4.2
Centrica -1.6

An equally-weighted portfolio of the above strong October stocks would have out-performed every year an equally-weighted portfolio of the above weak October stocks by an average of 7.9 percentage points in October for the past ten years.

Social Share Toolbar

US mid-term elections

Multiple ballots are held at the time of the US mid-term elections, including those at the municipal and state level, and also all the seats are up for election in the House of Representatives and a third of the seats in the Senate.

They are called “mid-term” as they take place in the middle of the four-year presidential term; in other words they take place two years after the presidential election. As such they are often regarded as a referendum on the performance of the prevailing president and his party.

In a recent article in the Financial Times, Ken Fisher described a market anomaly that he calls the 86.4 per cent miracle. According to Fisher, since 1925 returns on the S&P 500 have been positive for 67.4% of all calendar quarters, but for the 4th quarter of a mid-term election year and the two following quarters returns have been positive on average 86.4%. Fisher summarises-

midterm elections mean three straight quarters where the market rises 28 per cent more of the time than average.

What is the reason for this? According to Fisher: legislative gridlock. During electioneering campaigns politicians promise lots of radical legislation (that investors invariably dislike) to buy votes. But the reality of most mid-term elections is that the president’s party loses seats resulting in gridlock in Washington. In other words, while there is much sound and fury in the lead up to an election, it is followed by relative political calm – which investors like.

Given the high correlation of the US and UK equity markets, might this anomaly also apply to the UK?

The following chart plots the proportion of positive returns for the FTSE All Share Index for all quarters (grey bars) and those for the 4th quarter of a mid-term election (MTE) year (purple bars) and following 1st and 2nd quarters. To analyse the consistency of the anomaly over time, results are given for four different time periods.

For example, for the period 1910-2014, the FTSE All Share Index has had positive returns in 61% of all quarters, 62% of 4th quarters of a mid-term election year, 77% of the following 1st quarters, and 81% of the following 2nd quarters.

US mid-term elections and positive returns for FTAS [2014]Looking at the above chart the first observation to make is that the UK market experienced a greater proportion of positive returns in the 4th quarter of mid-term election years and the following two quarters than the average for all quarters – and this applied for all four of the different time periods tested. So this was consistent with the US results quoted by Fisher.

Regarding the period 1925-2014 (the period referred to by Ken Fisher), returns have been positive in 62.1% of all quarters (this compares a figure of 67.4% for the S&P 500 quoted by Fisher), and the average for the three (MTE) quarters has been 75.8% (compared with 86.4% for the S&P 500). So, where Fisher found that the three (MTE) quarters rose 28% more of the time than the average, in the UK the equivalent figure has been 22%.

A second observation to make is that the out-performance of the 4th and 1st (MTE) quarters over the average for all quarters has markedly increased in the most recent period from 1980. And that since 1980 the (MTE) quarter with the highest proportion of positive returns has been the 4th – in fact the UK market has risen in every 4th (MTE) quarter since 1980.

The following chart is similar to the above, except that it plots the average returns instead of the proportion of positive returns. For example, since 1910, the average return of the FTSE All Share Index for all quarters has been 1.5%, for the 4th (MTE) quarter it has been 2.4%, for the 1st (MTE) quarter 6.3%, and for the 2nd (MTE) quarter 4.2%.

US mid-term elections and average quarterly returns for FTAS [2014]Generally, the same profile of performance seen above is repeated here – all three (MTE) quarters out-perform the average. Since 1925 the average return for all quarters has been 1.7%, whereas the average return for the three MTE quarters has been 5.0%.

In 2014 the US mid-term elections will be held on 4 November, while the 4th (MTE) quarter starts 1 October. Fisher predicts “glorious gridlock” and a consequent “magical melt-up” for the market.

 

Social Share Toolbar

What’s so special about Tuesday?

The following chart shows the average returns of the FTSE 100 Index for each day of the week since 1984. For example, since 1984 the average return of the index on Monday has been -0.01%, while for Tuesday it has been 0.06%.

Day of the week (1984-2014)But the above analysis is over a long period and the return characteristics of the five days changes somewhat over time. For example, the following chart shows the average returns of the FTSE 100 Index for each day of the week for the calendar year so far.

Day of the week (Jan-Aug 2014)This has the rather odd result that the only day with a positive return in 2014 so far has been Tuesday by a large margin – on average the the market has fallen on the four other days.

The following chart plots the cumulative returns for each of the five days of the week for the first eight months of the year.

Day of the week (Jan-Aug 2014)_cumulative

Social Share Toolbar

The Stock Market in September

After a traditionally quiet time for equities over the summer, things liven up for investors in September. But not necessarily in a good way – September is the worst month in the year for shares. Since 1982 the FTSE All Share Index has fallen on average 1.0% in this month. And since year 2000 the average month return has been even worse at -1.7%. Along with poor average returns the volatility of returns has been higher than any other month since 2000. Having said all that, the market has actually risen in September more times than it has fallen since 2000 – it’s just that when the market does fall it tends to be a significant decline. This can be seen in the accompanying chart which plots the percentage performance of the FTSE All Share Index for each September since 1982.

Monthly returns of FTSE All Share Index - September (1982-2013)Interestingly, the UK market is far from unique in having a weak September. A recent academic paper announced the result of a study of the monthly performance of equity markets in 70 countries. The research found that on average the worst month for stock performance was September – on average shares rose only 0.07% across all 70 markets in this month, with September being the weakest month in 25 countries.

FTSE 250

So, overall, not a rosy picture for shares in this month. And it is especially bad for mid-cap stocks. On average the FTSE 100 Index out-performs the FTSE 250 Index by 0.7 percentage points in September – making September, along with October, the worst two months for mid-cap stocks relative to the large-caps.

In an average month for September the market tends to gently drift lower for the first three weeks before rebounding slightly in the final week – although the final trading day (FTD) of the month has historically been one of the weakest FTDs of all months in the year.

Sectors

In the last twenty years the sectors that have been strong in September have been: Pharmaceuticals & Biotechnology, Food & Drug Retailers, and Electricity. While the weak sectors have been: General Retailers, Chemicals, and Electronic & Electrical Equipment.

Diary

Dates to watch this month are: 1 Sep – NYSE closed (Labor Day), 4 Sep – MPC interest rate announcement, 5 Sep – US Nonfarm payroll report, 10 Sep – FTSE 100 Index quarterly review, 16 Sep – Two-day FOMC meeting starts, 19 Sep – Triple Witching.


Article first appeared in Money Observer

Further articles on September.

Social Share Toolbar

The Stock Market in August

Not surprisingly perhaps, during the low-volume summer doldrums, the performance of shares in August is very similar to that in July. The average return for the stock market in the month is 0.8%, which makes August the fifth strongest month in the year; although since 2000 the average return has fallen to 0.3%. The probability of a positive return in August is 61%. It should be noted that there have been some nasty surprises in August, with large falls of over 7% in 1998 and 2011. But generally the volatility of stock returns for August is around the median for all months – certainly significantly below the high-volatility months of January, September and October.

Monthly returns of FTSE All Share Index - August (1982-2013)In an average month for August the market tends to drift lower for the first couple of weeks and then increase for the final two weeks of the month. The final trading day of the month has historically been strong.

FTSE 100 v S&P 500

An interesting characteristic of August is that it is the strongest month for the FTSE 100 Index relative to the S&P500 Index – the former has out-performed the latter by an average of 0.7 percentage points this month. In the 29 years since the start of the FTSE 100 Index, it has out-performed the US index in August in 18 years.

Sectors

The sectors which tend to be strong in August are Food & Drug Retailers, Gas, Water & Multiutilities, Health Care Equipment & Services and Household Goods; while the only predominantly weak sector is Chemicals.

Shares

At the stock level, the five strongest FTSE 350 companies in August have recently been Fisher (James) & Sons [FSJ], Keller Group [KLR], Bunzl [BNZL], Centrica [CNA] and Tesco [TSCO]. Fisher (James) is the only FTSE 350 company whose shares have risen every August in the past ten years; the other four shares have all risen in nine of the past ten years in August. Three weak August stocks are Pennon Group [PNN], Rio Tinto [RIO] and Investec [INVP].

Diary

August is the busiest month for FTSE 100 and FTSE 250 interim results announcements: 40 FTSE 100 companies and 87 FTSE 250 companies announce their interims this months. So, not a good month for analysts to take a holiday.

Significant dates this month are: the US Nonfarm payroll report on the 1st, MPC interest rate announcement on the 7th, the MSCI quarterly index review announcement on the 13th


Article first appeared in Money Observer

Further articles on August.

 

 

Social Share Toolbar

First trading day of August

Tomorrow will be the first trading day (FTD) of August.

Since 1984, the FTSE 100 Index has an average return of 0.06% on the August FTD, which makes it the ninth strongest FTD of the year.

The following chart shows the returns for every August FTD since 1984.
First trading day of August (1984-2013) [2014]

 

Social Share Toolbar

Last trading day of July

Tomorrow will be the last trading day (LTD) of July.

Since 1984 the index average return on the July LTD has been 0.16%, which makes it the fifth strongest month LTD of the year. The probability of a increase on the July LTD is 47%

The following chart shows the FTSE 100 Index returns for every July LTD since 1984.
Last trading day of July (1984-2013) [2014]

 

Social Share Toolbar