Market behaviour on the days around Budget Day

The United Kingdom used to have have two annual Budgets (what the UK Treasuary calls “fiscal events”), one in the Spring and the other in the Autumn. But from 2017 it is switching to having just one Budget in the year – in the Autumn. The reason is to allow major tax changes to occur annually, before the start of the fiscal year. (Further info on the new Budget timetable can be found on the Treasury web site.)

So, 2017 saw the last Spring Budget, and the Autumn Budget will take place on Wednesday 22 November 2017.

Below we look at the immediate effect of the Budget on three asset classes in the three days around Budget Day:

  1. B(-1): the day before the Budget
  2. B(0): Budget Day
  3. B(+1): the day after the Budget

Equities

The following chart plots the daily returns for the FTSE 100 Index for the three days around Budget Day for the years 2000-2017. For example, in year 2000 the Budget was on 21 March, the day before the Budget the FTSE 100 rose 1.04%, on Budget Day the index fell 0.13%, and on the day after the index fell 0.12%.

Daily returns for FTSE 100 for the three days around the Chancellor's Budget [2000-2017]

GBPUSD

Similar to the above, the following chart plots the daily returns of GBPUSD around Budget Day from year 2000.

Daily returns for GBPUSD for the three days around the Chancellor's Budget [2000-2017]

Gilts

And, finally, the performance of gilts (the 8% Treasury 2021 is taken as a representative gilt) around the budget.

Daily returns for 8 Treasury 2021 for the three days around the Chancellor's Budget [2000-2017]

Summary

The following chart shows the average returns for the period 2000-2017 for each respective asset class for the three days around the Budget.

Average returns for the three days around Chancellor's Budget [2000-2017]

And the following chart shows the proportion of positive returns for the three asset classes in three days around the Budget.

Positive returns for the three days around Chancellor's Budget [2000-2017]

On average since 2000 the equity market has seen mildly positive daily returns on the day before the Budget and on Budget Day itself. But the most significant observation is that equities have been weak on the day after the budget.

On average the pound against the dollar has seen little change on the day before the Budget and on Budget Day itself, but has been strong on the day after the budget.

While, on average, gilts have been weak for all three days, with the weakest day being the day after the Budget.

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FTSE 100 companies 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 96% below its ATH. While Croda Intl, Prudential, RELX, Scottish Mortgage, and Micro Focus Intl are all within 1% of their ATH.

FTSE 100 companies fall from all time high (percent) [Nov 2017]

Observations:

  • 12 FTSE 100 stocks are within 5% of their ATH.
  • 22 stocks are currently more than 50% below their ATH.
  • 4 stocks are currently more than 75% below their ATH (BT, RSA Insurance, Lloyds Banking, and RBS).
  • The average of the falls from the ATH is 30% (the median is 25%).

The following chart is similar to the above but shows the number of days since the stocks hit their all time highs.

FTSE 100 companies fall from all time high (days) [Nov 2017]

Observations:

  • 6 FTSE 100 stocks have hit their ATH in the past week (Schroders, Informa, Prudential, RELX, Scottish Mortgage, and Micro Focus Intl).
  • 28 stocks hit their ATH over 10 years ago.
  • 8 stocks in the FTSE 100 Index hit their all-time highs in the last millennium (IAG, RSA Insurance, Aviva, Lloyds Banking, GlaxoSmithKline, Rentokil Initial, Kingfisher, and BT).
  • The average of the number of days since the ATH is 1991 (5.5 yrs). The median is 840 (2.3 yrs).
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Strategies included in the new 2018 edition of the Almanac

Almanac cover - 2018 (small 2)

The newly published Almanac 2018 includes analysis of the following strategies:

  • Bounceback Portfolio – a strategy that buys the worst performing shares in a year, and then sells them after three months into the new year; the strategy has out-performed the Index in 13 of the last 15 years.
  • Construction Sector 4M Strategy - exploits a seasonality anomaly of the construction sector that greatly out-performs the FTSE 100 Index.
  • 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 8.2 percentage points annually.
  • Sell In May Sector Strategy - how to exploit the Sell in May effect with sectors.
  • Summer Share Portfolio - a portfolio of seven stocks that has out-performed the market in nine of the last ten years.
  • Sell Rosh Hashanah, Buy Yom Kippur – the US equity market tends to be weak between these two Jewish holidays; is there a similar effect in the UK market?
  • Santa Rally - does a Santa Rally exist for shares and, if so, when does it start?
  • Day of the Week Strategy – a strategy exploiting the day of the week anomaly that out-performs the FTSE 100 Index.
  • Tuesday Reverse Monday - do market returns on Tuesdays reverse those on Monday?
  • Turn of the Month Strategy - all the market’s gains occur in the six days around the turn of the month.
  • FTSE 100/250 Monthly Switching Strategy – on the back of research into the comparative monthly performance of the two indices, a strategy of switching between the two markets is found that greatly out-performs either index individually.
  • FTSE 100/S&P 500 Switching Strategy – the strong/weak months for the FTSE 100 Index relative to the S&P 500 Index are identified; and a strategy of switching between the two markets is found that produces twice the returns than either market individually.
  • Monthly Share Momentum Strategy – a monthly re-balanced momentum portfolio of FTSE 100 stocks beats the market.
  • Quarterly Sector Strategy – The strongest/weakest sectors for each quarter are identified; and the Quarterly Sector Strategy continues to beat the market. Is this strategy even easier than the World’s Simplest Trading System mentioned below?
  • Quarterly Sector Momentum Strategy – a portfolio comprising the best FTSE 350 sector from the previous quarter, and re-balanced quarterly, out-performs the FTSE All Share Index by an average of 2.0 percentage points per month. A variant – buying the worst sector of the previous quarter – has performed even better.
  • Low/high Share Price Strategy – a portfolio of the 20 lowest priced shares in the market has out-performed a portfolio of the 20 highest priced shares by an average 39 percentage points each year since 2002.
  • World’s Simplest Trading System - a simple trading system based on moving averages with an impressive performance.

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Day of the week grid

An update of the Day of the Week grid.

This is a table showing the daily returns of the FTSE 100 Index for every day so far in 2017. Positive returns are highlighted in green, negative returns in red. (White cells indicate a market holiday.)

Day of the week grid [Nov 2017]

Pattern-match away…!

Other articles looking at returns on days of the week.

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History of Bitcoin

The chart below plots the price of Bitcoin from July 2010 to November 2017. The price on the Y-axis is plotted on a logrithmic scale (as the price has grown exponentially).

History of Bitcoin chart

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The new Almanac for 2018!

The new edition of the Almanac, Harriman’s Stock Market Almanac 2018, is at the printers now and will be available from 27 November 2017. Order your copy now!

Almanac cover - 2018

 

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Market returns in odd and even weeks

A couple of years ago the Almanac wrote about a strange characteristic of the UK equity market which was the difference in performance in odd and even weeks. The original article is here (see the original article for the definition of odd/even weeks etc.) To recap briefly, the FTSE 100 Index saw much stronger returns in odd weeks than even weeks.

Let’s see what’s happened recently and if this strange characteristic still exists. 

The following chart shows the FTSE 100 average returns for odd and even weeks for the period 2010 to 2017, and also for the individual years 2016 and 2017 (to date). 

Average FTSE 100 returns in odd and even weeks

As can be seen, for the period from 2010 the FTSE 100 has seen on average positive returns in odd weeks and negative returns in even weeks. In effect, for the last few years in aggregate all the growth in the index has been due to its performance in odd weeks.

In 2016, the market on average did see positive returns in even weeks (albeit still less than the odd-week returns). But so far in 2017 the longer-term trend has reasserted itself, with strong odd-week returns and negative even-week returns.

The following chart updates the performance of two hypothetical portfolios: one of which only invests in the market in odd weeks, and the other only invests in even weeks.

Odd v Even Week FTSE 100 Portfolios [2010-2017]

The significant divergence in performance previously observed has continued to today. Having started with values of 100 in 2010, by November 2017 the Odd Week Portfolio would have had a value of 187, compared with a value of 75 for the Even Week Portfolio. The change in value of the Even Week Portfolio has changed little from 2015, whereas the Odd Week Portfolio has grown strongly.

As mentioned in the original article, there is no obvious reason for this weekly phenomenon, although such weekly effects have been seen elsewhere – for example, the FOMC Cycle.

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CME Bitcoin Futures Contract Specifications

The following table gives the contract specifications for the proposed cash-settled CME Bitcoin futures.

Contract Unit 5 bitcoin, as defined by the CME CF Bitcoin Reference Rate (BRR)
Minimum Price Fluctuation Outright: $5.00 per bitcoin = $25.00 per contract

Calendar Spread and Basis Trade at Index Close (BTIC): $1.00 per bitcoin = $5.00 per contract

Trading Hours CME Globex and CME ClearPort: 5:00 p.m. – 4:00 p.m. CT Sunday – Friday

BTIC: 5:00 p.m. – 10:00 a.m. or 11:00 a.m. CT (4:00 p.m. London Time) Sunday – Friday

Product Code Outright: BTC

BTIC: BTB

Listing Cycle Nearest 2 months in the March Quarterly cycle (Mar, Jun, Sep, Dec) plus the nearest 2 “serial” months not in the March Quarterly cycle.

Contract months for initial listing: Dec 2017, Jan 2018, Feb 2018, Mar 2018.

Termination of Trading Last Day of Trading is the last Friday of contract month.

Trading in expiring futures terminates at 4:00 p.m. London time on Last Day of Trading.

Position Limits Spot Position Limits are set at 1,000 contracts. A position accountability level of 5,000 contracts will be applied to positions in single months outside the spot month and in all months combined.  The reportable level will be 25 contracts.
Block Minimum 5 contracts
Price Limits Price limits for a given Business Day are made by reference to the most recent Bitcoin Futures settlement price, settled at 4:00 p.m. London time each Business Day.

Special price fluctuation limits equal to 7% above and below prior settlement price and 13% above and below prior settlement price and a price limit of 20% above or below the previous settlement price. Trading will not be permitted outside the 20% above and below prior settlement price.

Settlement Cash settled by reference to Final Settlement Price, equal to the CME CF Bitcoin Reference Rate (BRR) on Last Day of Trading.

Further info on Bitcoin futures at the CME web site.

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Volatility of markets in 2017

The following chart shows the volatility of various markets so far in 2017.

Volatility In 2017

Not difficult – or surprising – to spot the most volatile market here.

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The Stock Market in November

Since 1990 the FTSE All-Share Index has seen an average return of 0.7% in the month of November; with positive returns in 15 of the last 27 years. This ranks November in the middle of the 12 months for equity performance. However, in recent years the market has been noticeably weak in November ­in the last 11 years the Index has only seen positive returns in the month in three years.

Monthly returns of FTSE All Share Index - November (1984-2016)

Sell in May…

The significant feature of November is that it marks the start of the strong six-month period of the year (November to April ­ an aspect of the Sell in May effect). In other words, investors should be increasing exposure to the market this month (if they haven’t already done so in October).

Sectors

In the last ten years the FTSE 350 sectors that have performed strongly in November have been: Beverages, Electronic & Electrical Equipment, Fixed Line Telecommunications, Food Producers, Life Insurance, and  Travel & Leisure. While the weak sectors have been: Aerospace & Defense, Banks, Oil & Gas Producers, and Real Estate Investment Trusts.

FOMC announcements

Since 1981 the US Federal Open Market Committee (FOMC) has had eight scheduled meetings per year, the timing of which is quite irregular. Each meeting is two days long, with a policy statement released at the end of the second day (1 November this month). Many academic papers have studied the effect of these FOMC announcements on financial markets. One such paper found large average excess returns on U.S. equities in the 24-hour period immediately before the announcements (an effect the paper called the “Pre-FOMC Announcement Drift”). According to this paper, “about 80% of annual realized excess stock returns since 1994 are accounted for by the pre-FOMC announcement drift”.

A quite amazing finding!

It might be added that a similar effect can be seen for the UK equity market as well. The average daily return for the UK market in the 24 hours before the FOMC statement is 0.33%, over ten times greater than the average daily return on all other days.

Diary

Besides the FOMC statement other dates to watch for this month are: 2 Nov – MPC interest rate announcement at 12 noon, 3 Nov – US Nonfarm payroll report, and 23 Nov – Thanksgiving Day (US), NYSE closed.


Article first appeared in Money Observer

Further articles on the market in November.

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