On 17 March 1968 the system that fixed the price of gold at USD35.00 collapsed and the gold price was allowed to fluctuate. The following chart shows the dollar price of gold since that time.
The following chart shows the average returns by month of gold($) for the period 1968-2014.
And the chart below has similar parameters but it shows the proportion of monthly returns that were positive for each month.
- Gold($) has been strong in the months of February, September and November
- Gold($) has been weak in the months of March and October.
Since 1968 the month with the highest volatility has been January, while the lowest has been April.
October has a reputation for being a volatile month for shares – is this in fact true?
Daily volatility within a year
The standard way to measure volatility is to calculate the standard deviation of returns (in this case these will be daily returns). The following chart plots the standard deviation of the daily returns of the FTSE 100 Index for each trading day of the year for the period 1984 to 2014. For example, the standard deviation of the 30 daily returns on the first trading day of the year since 1984 is 1.37. To smooth the line what is actually plotted is the 5-day rolling average of the daily standard deviations.
It can be seen that the volatility of daily returns fluctuates in a range of approx 0.8-1.2 for the first eight months of the year. It then starts to increase in September and peaks in October before trailing off for the remainder of the year. So, according to this study of daily returns throughout the year, October is indeed the most volatile month.
Daily volatility over 30 years
Having looked at the daily volatility profile for the 12 months of the year, let’s now look at how daily volatility has changed over the past three decades.
The chart below plots the standard deviation of daily returns of the FTSE 100 Index on a 50-day rolling basis for the period 1985-2014.
Over the past three decades there have obviously been periods that saw great spikes in volatility (notably: Black Monday in 1987, the sell-off in 2002, and the credit crunch in 2008).
However, overall levels of daily volatility have not changed greatly over the period. The (50-day rolling) average daily volatility since 1985 is 0.99 and currently stands a bit below that at 0.83. As can be seen, since the spike in daily volatility in 2008, the trend of daily volatility has been down – reverting to the mean daily volatility for the period.
At the time of writing, the 50-day rolling average daily return is 0.058% with a standard deviation of 0.83. This means that in the past 50 days, 16 days (32% of the days) have seen daily changes more than +51 or less than -57 points in the FTSE 100.
Below is a list of 10 seasonality trends that can be found in the UK stock market-
- Sell in May – This extraordinary effect remains as strong as ever: since 1982 the market in the winter months has out-performed the market in the summer months by an average 8.8 percentage points annually.
- January effect – Performance in January tends to be inversely proportional to company size (i.e. small cap companies out-perform large-caps).
- Construction sector – One of the most well-known seasonality trends is the out-performance of the construction sector in the first quarter of the year (in fact the sector’s strong period today is more likely to be the three-month period Dec-Feb).
- Month of the year – April and December are the strongest months in the year for the stock market, while May, June and September are the weakest.
- Day of the week – Wednesday is the new weakest day of the week (Monday used to be), and the strongest days are now Tuesday and Thursday.
- Turn of the month – The market tends to be weak a few days either side of the turn of the month, but abnormally strong on the first trading of the new month (except December).
- Holiday effect – In recent years the market has been significantly strong on the days immediately before and after holidays and weak fours days before and three days after holidays.
- Quarterly sector performance – Individual sectors display different and consistent return characteristics for each quarter of the year.
- FTSE 100 v S&P 500 – 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.
- Christmas and New Year – The trading days around Christmas tend to have a particular pattern of returns.
These seasonality trends, and others, are covered in the new edition of the UK Stock Market Almanac just published.
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For a while after World War II nobody needed to worry about currency fluctuations because currencies were tied to the US dollar under the Bretton Woods system. Exchange controls were in place and some older readers may remember being restricted to taking no more than £50 out of the UK.
But on 15 August 1971 President Nixon announced that the US was ending the convertibility of the US dollar to gold and this led to the end of the Bretton Woods system and fixed-rate currencies – such as sterling – became free-floating.
The following chart shows the fluctuations of GBPUSD since it became free-floating in 1971.
As can be seen, in the decade following 1971 sterling fell against the dollar (almost reaching parity in February 1985); but since then has been broadly trading in the range 1.4-2.0.
The following charts show the monthly changes in GBPUSD for the last 20 years.
The chart below shows the average monthly returns for GBPUSD. For example, on average the rate has fallen 0.39% in January.
The chart below shows the proportion of monthly returns that were positive. For example, GBPUSD has risen in January in 46% of years since 1993.
- Weak months for GBPUSD have been: February, May, August and November
- Strong months for GBPUSD have been: April, September and October
These observations would seem to have some persistency as they are valid for other periods analysed: 1971-2014 and 2000-2014.
Companies listed on the London Stock Exchange are required to release certain information to the public. Some of these statements are one-offs and unpredictable, such as news of takeovers or board changes, while others follow a more regular timetable. For investors, two important such announcements each year are-
- interim results (known as interims): usually reported about eight months into a company’s financial year, they relate to the un-audited headline figures for the first half of the company’s year.
- preliminary results (known as prelims): un-audited figures published prior to the full annual report at the end of the company’s financial year. (Note – although these are termed “preliminary” these are very much the real final results.)
These announcements are watched very carefully and have the potential to significantly move the share price of a company.
The following chart plots the frequency distribution of the dates of the interim and preliminary announcements for FTSE 100 companies.
The following chart is similar to that above except this time the companies are in the FTSE 250 Index.
For the FTSE 250 companies, the announcements are a little more evenly distributed throughout the year, but the main months are the same as those for the FTSE 100:
- July/August the busiest for interims, and
- February/March the busiest for the prelims.
2015 is the year of the general election in the UK.
How will the stock market behave during the year?
The newly published UK Stock Market Almanac looks at the history of general elections in the UK and finds the trends that could recur in 2015.
In detail, the Almanac looks at:
- Stock market in election years – charts displaying the performance of the FTSE All-Share Index in the 15 General Election years since 1951.
- Stock market around elections – analysis of the behaviour of share prices in the days around a general election.
- Politics and financial markets – a chart showing the correlation of equity prices, interest rates, GBPUSD currency rate, gold price and the political party of government since 1944.
And, still on a political theme, the 2015 Almanac also looks at–
- Budget Day – how do equities, currencies and gilts behave on the days around the Chancellor’s Budget Day?
Order your copy now!
The chart below was created by taking the 300 FTSE 350 companies that have seven or more year’s historic price data and then using regression analysis to calculate the slope of the regression line and the R-squared for each of the 300 companies’ year end share prices for the last ten years. These 300 pairs of figures (i.e. a gradient figure and R2 for each company) were then plotted on a scatter chart (below).
The above chart is interesting. A line of best fit has been drawn which has a positive slope, which indicates that shares with higher returns tend to also have higher R-squareds (i.e. lower volatility around the trend line).
This is a Good Thing – this is what investors want: shares with high returns and low volatility.
Shares are therefore attractive in the top-right quadrant of the chart above (i.e. shares with positive returns and R2 over 0.5). An example would be Rotork (circled in the chart) with a slope gradient of 2.82 and R2 of 0.91 for its year end share prices since 2004..
To identify shares in the top-right quadrant we can calculate the multiple of the slope gradient and R2 and rank shares in descending order by this value.
The following table shows the top 20 shares in the FTSE 350 Index as ranked by this multiple of slope gradient and R2. This is, in effect, a ranking of the highest-return/lowest-volatility shares for the past ten years, and as such they might be regarded as the best trending shares over that period.
||Slope x R2
|Personal Assets Trust
|Randgold Resources Ltd
|Reckitt Benckiser Group
|British American Tobacco
Do shares exhibit a momentum effect from one month to the next?
If we selected the best performing shares in one month and created an equally-weighted portfolio of those shares to hold for the following month, would that portfolio out-perform the market index? Or, more interestingly, if we did this systematically every month (i.e. our portfolio each month is comprised of the best performing shares in the previous month), would that portfolio out-perform the market?
The following chart shows the results of operating two such momentum portfolios from 2011-2014:
- Port (5): at the end of each month selects the 5 best performing shares and holds these for the following month, re-balancing at the end of each month
- Port (10): as above, but the portfolio holds 10 shares each months
Both portfolio values have been re-based to start at 100, as has the FTSE 100 Index included in the chart as a benchmark.
By mid-2014 the momentum Port (5) would had a value of 176, the momentum Port (10) would had a value of 178, compared with a value of 114 for the FTSE 100.
The following chart plots the average performance of the FTSE 100 Index during November since 1984.
As can be seen, historically the market has increased, with a few ups and downs, throughout November, ending the month at the month high.
The following chart shows the average performance of the market in October (1984-2013) and overlays the actual performance in October 2014.