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.


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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

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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.


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.


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.

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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.


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.


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].


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.



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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]


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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]


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Strong/weak sectors in August

Strong sectors

The table below lists the sectors that have historically out-performed the market in August.

Sector TIDM
Food & Drug Retailers
Gas, Water & Multiutilities
Health Care Equipment & Services
Household Goods
Software & Computer Services

 Weak sectors

The table below lists the sectors that have historically under-performed the market in August.

Sector TIDM

See also

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FOMC announcements and financial markets

The Federal Open Market Committee (FOMC) is the monetary policy-making body of the U.S. Federal Reserve System.

Since 1981, the FOMC has had eight scheduled meetings per year, the timing of which is quite irregular, The schedule of meetings for a particular year is announced ahead of time.

Starting in 1994, the FOMC began to issue a policy statement (“FOMC statement”) after the meetings that summarised the Committee’s economic outlook and the policy decision at that meeting. The FOMC statements are released around 2:15 pm Eastern Time. Before 1994 monetary policy decisions were not announced; investors therefore had to guess policy actions from the size and type of open market operations in the days following each meeting.

There has been academic interest in the influence of these announcements on the relationship between monetary policy actions and financial markets.

This article presents a brief review and listing of academic papers on FOMC announcements and financial markets.

Bomfim and Reinhart (2000) analysed the reaction of financial markets in the period after 1994 when the Federal Reserve started explicitly announcing its monetary policy decisions. They commented that the changes in disclosure practices potentially reduced the uncertainty about both the timing and the motivation for monetary policy actions. In their research they found little relation between the financial markets and the announcement of surprise decisions by the Fed. They concluded that Federal Reserve actions were more important for financial markets than their announcements.

The following year Kuttner (2001) analysed the impact of monetary policy actions on bill, note, and bond yields. Kuttner found that the response of interest rates to anticipated target rate changes was small, while their response to unanticipated changes was large and highly significant.

Regarding foreign exchange, Kalyvitis and Michaelides (2001) found evidence for an immediate overshooting effect for the US dollar in response to monetary policy shocks (unanticipated policy decisions). Andersen et al (2002), found that announcement surprises produced US dollar rate jumps, and concluded that high-frequency exchange rate dynamics are linked to fundamentals. They also observed that the market’s reaction was asymmetric: bad news having a greater impact than good news.

Bomfim (2003) focused on the stock market which was found to experience abnormally low volatility on days preceding scheduled policy announcements. Although this effect had been only significant in the previous four to five years. The paper also found that the element of surprise in announcements tended to boost stock market volatility significantly in the short run, with positive surprises (higher-than-expected values of the target federal funds rate) having a greater effect than negative ones.

Gurkaynak et al (2005) proposed that when investigating the effects of U.S. monetary policy on asset prices it was important to consider two factors: the current federal funds rate target and the future path of policy. By analysing high-frequency data from 1990 they found that both factors had important but differing effects on asset prices, and that FOMC statements had a much greater impact on longer-term Treasury yields.

Fleming and Piazzesi (2005) observed that while Treasury note yields were highly volatile around FOMC announcements, the average effect of Fed funds target rate surprises on such yields was less marked. Their explanation was that yield changes were dependent not only on the announcement surprises themselves but also on the shape of the yield curve at the time.

The most cited paper on this topic is Bernanke and Kuttner (2005) which attempted to quantify the effect of Fed actions and found that on average a hypothetical unanticipated 25-basis-point cut in the Federal funds rate target is associated with about a 1% increase in broad stock indexes. They also found that the effects of unanticipated monetary policy actions on expected excess returns accounted for the largest part of the response of stock prices.

Lucca and Trebbi (2009) presented a technique to automatically score the content of central bank communication about future interest rate decisions from various news sources. Applying this technique to FOMC statements they found that short-term nominal Treasury yields responded to changes in policy rates around policy announcements, whereas longer-dated Treasuries mainly reacted to changes in forward policy communication.

On the possible international effect, Hayo et al (2010) found that FOMC communication had a significant impact on European and, to a slightly lesser extent, Pacific equity markets. The following year Hausman and Wongswan (2011) broadened the scope to look at global asset prices and found that global equity indexes responded mainly to target surprises (changes to the current target federal funds rate); exchange rates and long-term interest rates responded mainly to the path surprises (revisions to the expected path of future monetary policy); and short-term interest rates respond to both surprises. They also found that the effect of FOMC announcements varied across countries, dependent on a country’s exchange rate regime (for equity and interest rates) and the scale of U.S. investment in the market (for equities).

Hanson and Stein (2012) challenged the standard model that macro policy can not move longer-term real rates, by finding that a 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate.

Previously most papers had looked at the effect of FOMC announcements on financial markets on the day of the announcement or subsequent to it, but Lucca and Moench (2013) found large average excess returns on U.S. equities in the 24-hour period immediately before the announcements. Further, these excess returns have increased over time and they account for sizable fractions of total annual realized stock returns (an extraordinary result). They found that such pre-FOMC excess returns occurred also in major international equity indices, although they found no such effect in U.S. Treasury securities and money market futures. On a similar topic Bernile et al (2014), found evidence of informed trading during lockup periods ahead of FOMC announcements. Putting a monetary figure on this action they estimated that informed traders’ aggregate dollar profits ranged between $14 and $256 million.

Madeira and Madeira (2014) looked at the votes of the FOMC members (made public since 2002) and found that equities increased when votes were unanimous but fell when there was dissent.

Cieslak et al (2014) documents an astonishing finding, that the US equity premium follows an alternating weekly pattern measured in FOMC cycle time. In other words, the equity premium is earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time (with week 0 starting the day before a scheduled FOMC announcement day).

INDEX (of papers listed below)

[Papers listed in reverse date order; indicates major paper.]

  1. Intelligent Trading of Seasonal Effects: A Decision Support Algorithm based on Reinforcement Learning [2014]
  2. Stock Returns over the FOMC Cycle [2014]
  3. Asset pricing: A tale of two days [2014]
  4. Can Information Be Locked-Up? Informed Trading Ahead of Macro-News Announcements [2014]
  5. Comparing U.S. and European Market Volatility Responses to Interest Rate Policy Announcements [2014]
  6. Dissent in FOMC meetings and the announcement drift [2014]
  7. Effects of explicit FOMC policy rate guidance on interest rate expectations [2013]
  8. The Pre-FOMC Announcement Drift [2013]
  9. How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements [2013]
  10. Is macroeconomic announcement news priced? [2013]
  11. Monetary Policy and Long-Term Real Rates [2012]
  12. Jumps, Interest Rates, and Monetary Policy [2012]
  13. The Timing of FOMC Monetary Policy Announcements and Intraday Trading Volume Patterns [2012]
  14. Global asset prices and FOMC announcements [2011]
  15. Does FOMC news increase global FX trading? [2011]
  16. The impact of U.S. central bank communication on European and pacific equity markets [2010]
  17. Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements [2009]
  18. Exchange Rates and FOMC Days [2007]
  19. What Explains the Stock Market’s Reaction to Federal Reserve Policy? [2005]
  20. Monetary Policy Tick-by-Tick [2005]
  21. Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements [2005]
  22. Eyes on the Prize: How Did the Fed Respond to the Stock Market? [2004]
  23. The Greenspan Effect on Equity Markets: An Intraday Examination of US Monetary Policy Announcements [2004]
  24. What the FOMC Says and Does When the Stock Market Booms [2003]
  25. Pre-announcement effects, news effects, and volatility: Monetary policy and the stock market [2003]
  26. Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange [2002]
  27. New evidence on the effects of US monetary policy on exchange rates [2001]
  28. Monetary policy surprises and interest rates: Evidence from the Fed funds futures market [2001]
  29. Making News: Financial Market Effects of Federal Reserve Disclosure Practices [2000]


Intelligent Trading of Seasonal Effects: A Decision Support Algorithm based on Reinforcement Learning
Authors [Year]: Dennis Eilers, Christian L. Dunis, Hans-Jörg von Mettenheim, Michael H. Breitner [2014]
Journal [Citations]: Decision Support Systems,
Abstract: Seasonalities and empirical regularities on financial markets have been well documented in the literature for three decades. While one should suppose that documenting an arbitrage opportunity makes it vanish there are several regularities that have persisted over the years. These include, for example, upward biases at the turn-of-the-month, during exchange holidays and the pre-FOMC announcement drift. Trading regularities is already in and of itself an interesting strategy. However, unfiltered trading leads to potential large drawdowns. In the paper we present a decision support algorithm which uses the powerful ideas of reinforcement learning in order to improve the economic benefits of the basic seasonality strategy. We document the performance on two major stock indices.
Ref: AA929
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The Scottish Portfolio

In July 1698 a flotilla of five ships set sail from Leith, Scotland for Panama. Scotland had seen the colonisation successes of other European nations and wanted to get in on the action. So £400,000 was raised (about a fifth of all the wealth in Scotland at the time) for the Company of Scotland for Trading to Africa, and off they set westwards to the New World (the “Africa” part having been forgotten – investors didn’t seem to mind, or know). The venture became known as the Darien Scheme and the new colony in Panama was to be called Caledonia.

It did not turn out well. Lack of food and water, disease, drunkenness and, finally, a Spanish siege led to the abandonment of the colony in 1700. The effect on Scotland was traumatic. Many of the nobles and landowners were financially ruined and the morale such that many no longer believed Scotland could be an independent major power. The failure of the Darien Scheme is thought to have been a major factor in driving Scotland to signing the 1707 Act of Union with England.

In September, 207 years later, Scotland will be voting on whether to regain independence (coincidentally, again in the wake of a financial disaster – this time the recent credit crunch).

What would an independent Scotland look like to investors?

One way of analysing this is to look at the current Scottish companies listed on the LSE. The following chart plots the performance of a “Scottish” portfolio over the last ten years. The equally-weighted portfolio consists of the seven companies: Aberdeen Asset Management, Aggreko, Lloyds Banking Group, Royal Bank of Scotland Group (The), Standard Life, Weir Group, Wood Group (John); they were selected as having their company address in Scotland and being in the FTSE 100 Index.

Scottish PortfolioNot too impressive – over the ten years the Scottish portfolio would have massively under-performed the FTSE 100 Index.


Perhaps we should look at the portfolio without the banks; obviously the presence of RBS and Lloyds greatly affected the performance. So, the following chart is as above but this time without the bothersome banks.

Scottish Portfolio excl banksQuite a different story. And all five companies in the portfolio contributed to the strong out-performance of the FTSE 100 Index.

So, does this reflect the true strength of the real Scottish economy?

Perhaps. But we do seem to remember that before the credit crunch supporters of Scottish independence were claiming that the Scottish financial industry – led by the banks – would be one of the economic pillars of a newly independent Scotland.

Extract from The UK Stock Market Almanac 2014

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RPS Group [RPS] – 27 years on the LSE

On this day in 1987 RPS Group listed on the LSE.

Monthly seasonality of RPS Group

The following chart plots the average monthly out-performance of the shares over the FTSE 100 Index since 1988. For example, on average RPS Group has out-performed the FTSE 100 by 5.1 percentage points in March.
Average monthly performance of RPS Group [RPS] relative to the FTSE 100 Index (1988-2013)


  1. The strongest month for RPS Group shares relative to the market has been March (the shares have out-performed the market in this month in 16 of the last 25 years).
  2. The weakest month for RPS Group relative to the market has been October (the shares have only out-performed the market in this month in 9 of the past 26 years).

RPS Group is in the FTSE 350 Support Services [NMX2790] sector.

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