Does the FTSE 100 Index display a monthly seasonality?
[We last looked at this in 2014, so time to see if anything has changed.]
The following chart shows the proportion of months that have seen positive returns for the FTSE 100 Index since 1980. For example, the index rose in April in 28 years since since 1980 (76%).
Broadly, the pattern of behaviour has not changed greatly in the last two and a half years. The months which have seen the highest number of positive returns are still April, October and December.
But in recent years, since 2000, February has been getting relatively stronger, while January and March relatively weaker. Since 1980, the proportion of positive return months for January is 59%. but measured from 2000 the figure falls to 35%.
The following chart plots the average month returns for the FTSE 100 Index for the period 1980-2016. For example, since 1980 average return in January of the index has been 0.9%
Similar to the previous study, the standout two strong months of the year since 1980 have been April and December. Although since 2000 the performance of December has been dropping off and has been over-taken by October as the second best performing month in recent years.
The months with the lowest (in fact, negative) returns are still May, June and September. Again, things have changed slightly in recent years, with January equal with September as having the worst average returns since 2000.
The following chart is similar to the above (in that it plots the index average returns by month, the short brown horizontal bars), but it adds a measure of the extent of variation away from the average for each month (the measure is 1 standard deviation).
An obvious observation to make is that the variability of returns around the average are very large for all months. The months that have seen the greatest variability (i.e. volatility) have been September and October, and to a slightly lesser extent January. The months with the lowest variabilility have been April and December.
The following chart shows the cumulative returns indexed to 100 for each month. For example, £100 invested in the FTSE 100 only in the month of April from 1980 would have grow to £217 by 2016.
This is not meant to represent real-life investable portfolios (e.g. transaction costs are not included), but to illustrate the large effect the returns differences can have on cumulative performance over a long term,
- The superior returns for April and December can be clearly seen on this chart. Indeed, the close correlation of returns for the two months is remarkable, and rather odd. However, as can be seen, due to the recent couple of weak years for December, performance has been diverging between the the two months.
- The most striking change in behaviour is undoubtedly that for January. This was the strongest month for the FTSE 100 Index until the beginning of the millennium, since when its performance has fallen off quite dramatically.
- In a less dramatic fashion (than January) the returns for November have decreased strongly since 2005.
- The months represented by dashed lines are the six months May to October. These lines can be seen to largely occupy the lower part of chart – which supports the Sell in May effect.