London Stock Exchange holidays in 2018

The LSE will be closed on the following days in 2018-

Date Holiday Note
January 1, 2018 New Year’s Day
March 30, 2018 Good Friday
April 2, 2018 Easter Monday
May 7, 2018 Early May Bank Holiday
May 28, 2018 Spring Bank Holiday
August 27, 2018 Summer Bank Holiday
December 24, 2018 Christmas Eve
December 25, 2018 Christmas Day Closes at 12h30
December 26, 2018 Boxing day
December 31, 2018 New Year’s Eve Closes at 12h30

The above and other significant trading dates can be seen in the online Almanac Diary and can be added to your own online calendar.

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Long-term trend of the Dow Jones Industrial Average

What can the very long term tell us about the trend of the US equity market?

1900-2017

The chart below plots the month-end values of the DJIA (Dow Jones Industrial Average) from 1900 to the present day.

In January 1900 the DJIA had a value of 66 points, and in December 2017 (the time of writing) a value of 24,651.

Long-term trend of DJIA [1900-2017] 01

The above chart may be useful as a visual record of actual values of the DJIA, but it is not very helpful in discerning any underlying trend of the index.

Because the values of the DJIA vary so greatly over the period from 1900, it is more useful to plot them on a semi-log chart, where the Y-axis has a logarithmic scale. This is done in the following chart.

Long-term trend of DJIA [1900-2017] 02

This starts to look more useful.

To this chart we can now add a trendline (as has been done in the chart below).

Long-term trend of DJIA [1900-2017] 03

Regression analysis was used to fit a straight line of best fit to the values of the DJIA.

[Side note: although the trendline in the above chart is a straight line, it is useful to remember that this is an exponential line of best fit because the Y-axis is logarithmic.]

Obviously, the trendline does not perfectly match the DJIA values, but the fit is not bad. R-squared (R2) is a statistical measure of how close the data are to the fitted regression line. In this case the R2 value is 0.93. which is surprisingly high given the supposed nature of random-walk equity prices. 

We can use the equation of the fitted line to calculate trendline values of the DJIA at any time, including the future. The following table gives the calculated trend values for the current day and a few arbitrary dates in the future.

Long-term trend of DJIA - forecast from 1900

The calculated trend value of the DJIA for today (15 December 2017) is 11,941. The current actual level of the DJIA is 24,651, which means the DJIA is currently trading at a 106% premium to its trend value. Or, expressing this another way, the DJIA has to fall 52% to equal it’s long-term trend value.

As already mentioned, the table also calculates future trend values for the DJIA. For example, the DJIA trend value in December 2020 will be 13,928. And by December 2030 the DJIA trend value (23,142) will still be just below the current actual level of the DJIA index.

How much faith can we have in these calculated trendline values?

Well, the above trendline was fitted to DJIA data for the period from 1900 to today. Let’s see how the calculations change if we fit a trendline to DJIA data from 1919, just after the First World War.

1919-2017

So, the following chart is similar to the previous chart, except this time the time range is shorter at 1919-2017.

Long-term trend of DJIA [1919-2017]

By shortening the time range, the line of best fit now has an R2 of 0.94, a slight improvement on that for the previous chart (0.93). This means that we can have slightly more confidence that the DJIA actual values will be close the calculated  trend values.

Visually, we can see that the DJIA has been closer to this trendline in the last few years since the financial crisis in 2008, than the trendline calculated for the period from 1900..

As before, the following table shows the trend values calculated using the equation of the new line of best fit on the DJIA data from 1919.

Long-term trend of DJIA - forecast from 1919

This time the calculated trend value of the DJIA for today (15 December 2017) is 15,129. With the current actual level of the DJIA at 24,651, this means the DJIA is currently trading at a 63% premium to its trend value. Or, alternatively, the DJIA has to fall 39% to equal it’s long-term trend value.

So, first, it would seem that the trendline calculated on data from 1919 gives a closer approximation for today’s actual value of the DJIA than that calculated from 1900.

And, second, it seems that the trendline equations are quite sensitive to the exact time period analysed. In which case, let’s look at another example, this time DJIA data starting from 1946, just after the Second World War.

1946-2017

The following chart is as before, but this time the time range analysed is shorter: 1946-2017.

Long-term trend of DJIA [1946-2017]

The R2 (at 0.95) has again marginally increased for this line of best fit on this shorter period. Which suggests that the calculated trendline better fits the actual DJIA data.

And, visually, we can see that the  DJIA has been even closer to the trendline in the last few years since the financial crisis in 2008 than for the previous two time periods.

Broadly, the DJIA index traded very close to the trend line in the years 1946-1954, then the index traded above the trend. But from 1965 the index traded largely in a sideways pattern, and so by 1969 it crossed over the rising trendline to trade beneath it. Although the great bull market started in 1982, it wasn’t until 1995 that the index moved definitively back above the trendline. The market fell during the dot-com crash, but despite that the DJIA bounced off the trendline and did not fall below it. The index managed to stay above the trendline until the credit crunch in 2008, when the DJIA crashed down through the trendline. By 2011, the index had recovered to the trendline and then traded close to it for a number of years until the start of 2017 when the DJIA grew strongly and diverged from the trendline.

The following table shows the trend values calculated using the equation of the new line of best fit on the DJIA data from 1946.

Long-term trend of DJIA - forecast from 1946

This time the calculated trend value of the DJIA for today (15 December 2017) is 19,396. With the current actual level of the DJIA at 24,651, this means the DJIA is currently trading at a 27% premium to its trend value. Or, alternatively, the DJIA has to fall 21% to equal it’s long-term trend value.

And now, with this new trendline, the calculated trend value will be close to the current level of DJIA by December 2020.

So, the trendline of DJIA data from 1946 is not doing a bad job at estimating the current actual value of the Index.

Finally, let’s look at what happens when we calculate a trendline for the DJIA from 1971 – a somewhat arbitrary date, but chosen as the year that the Bretton Woods system ended and the US dollar became a fiat currency.

1971-2017

The following chart is as before, but this time the time range analysed is shorter: 1971-2017.

Long-term trend of DJIA [1971-2017]

As can be seen, for fairly long periods the DJIA traded close to the calculated trend values. And, for the first time in this analysis, the calculated trendline is currently above the level of the DJIA.

Again, and finally, the following table shows the trend values calculated using the equation of the new line of best fit on the DJIA data from 1971.

Long-term trend of DJIA - forecast from 1971

For this final period, the calculated trend value of the DJIA for today (15 December 2017) is 25,733. With the current actual level of the DJIA at 24,651, this means the DJIA is currently trading at a 4% discount to its trend value.

Summary

The following table summarises the  premiums that the DJIA is currently trading at over its calculated trend value, for the four different time periods.

For example, as a reminder, at the time of writing the DJIA Index is trading at a 106% premium to its trend value as calculated for data from 1900.

Long-term trend of DJIA - summary

So, which trendline do you choose? 

That, of course, is the big question.

If you think that data from the period 1900 to today is representative of the long-term trend of the DJIA Index and, importantly, that this trend is likely to continue, then this is the trendline to choose, with its indication that the DJIA is currently 106% “over-valued”. As such, you will be concerned that the DJIA is currently at risk of a large fall to move back towards its long-term trend value.

Alternatively, if you think that the time period of 1971 to today is more representative of the long-term trend of the DJIA Index, then you will be happy with the current level of the DJIA as it close to its trend value.

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Trading around Christmas and New Year

Does the equity market display any particular pattern in the days around Christmas and New Year?

Mean returns

The following chart plots the average daily returns of the FTSE 100 Index for nine days around Christmas and New Year for the periods 1984-2017 and also 2000-2017.

The nine days studied were-

  • Days 1-3: the three trading days leading up to Christmas.
  • Days 4-6: the three trading days between Christmas and New Year.
  • Days 7-9: the first three trading days of the year.

For example, since 1984 the average return of the index on the day before Christmas has been 0.24%

FTSE 100 average daily returns around Christmas and New Year [1984-2017]

Observations

  1. Market strength increases to the fourth day (the trading day immediately after Christmas). Since 1984 the fourth day has been the strongest day of the whole period, with an average daily return of 0.49% (albeit the volatility of returns on this day is high).
  2. Generally the profile of returns for the shorter time range (2000-2017) is similar to that for the whole period from 1984. The one significant difference is that since 2000 the strongest day of the period has been the first trading day of the new year. The new year generally starts strongly on the first day, with performance trailing off the following two days.
  3. The weakest day in the period is the third day of the New Year, followed by the last trading day of the year.

Let’s now see if the pattern of positive returns confirms the above findings.

Positive returns

The following chart plots the proportion of daily returns for the FTSE 100 Index that were positive on the nine days around Christmas and New for the period 1984-2017.

For example, for 84% of the years since 1984 the returns on the day after Christmas were positive.

FTSE 100 positive daily returns around Christmas and New Year [1984-2017]

The profile of behaviour demonstrated by the positive returns is similar to that for the mean returns above.

So, how did equities perform last year around Christmas compared to the average behaviour seen above?

Last year

The following chart replicates the first chart above with the average day returns for the period 2000-2017, and also plots the actual day returns for the nine days around Christmas in 2016.

FTSE 100 Index daily returns around Christmas and New Year

As can be seen, the actual returns last year roughly followed the average pattern since 2000: the strongest days were the days after Christmas and New Year, with performance quickly trailing off after New Year.


Almanac cover - 2018 (small 2)

The above is an extract from the newly published UK Stock Market Almanac 2018.

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The psychology of drawdowns

How do investors measure unrealised losses?

One way is to compare the current price with the price paid for an investment. So, for example, if you pay 100 for an investment and its current market price is 90, then you are sitting on a (unrealised) loss of 10%.

But if, after buying the investment at 100, the price had risen to 120 before then falling back to 90, then there is the temptation to anchor the price at 120 and regard the current price of 90 as a 25% loss.

This 25% loss is referred to as the drawdown, which is defined as the percentage loss from a previous peak. The concept is common in trading but can also be useful for investors to understand.

The following table shows the drawdowns for the FTSE All-Share Index for the period 1969-2017.

FTSE All-Share Drawdowns [1969-2017]

The first thing to notice about the chart is that there are an awful lot of drawdowns! In fact, because the market doesn’t make new highs every day it is usually in a drawdown state. And this can have a psychological effect on investors.

If you look at a typical long-term chart of the stock market, and many individual shares, you will usually see a line that starts at the bottom left and increases (moderately steadily) to the top right.

This is a Good Thing – stocks go up in the long-term!

However, that chart does not necessarily reflect the actual experience of being invested in the market over this period. For this, the drawdown chart above may more accurately represent the feelings of investors. This is because investors’ portfolios are underwater for most of the time, i.e. the portfolio value is below its peak value (which will most likely be a recent strong memory for the investor).

The table below breaks down how long the market spends at various drawdown levels. For example, for 16% of the time from 1969 the market had a drawdown of 5%-10%, and it was in a drawdown state of over 20% for 27% of the time. And, while a drawdown of just up to 5% may not seem very much, in practice it is 32% of the time that investors are likely to be feeling slightly disgruntled having “lost” money.

FTSE All-Share Drawdowns [1969-2017] 02

So, while the data shows us that stock markets increase over the long-term, the direct personal experience of investing may be for investors largely that of a prevailing sense of loss. This sense of loss is something that investors have to learn to live with.

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Sector performance 1Q

The following table lists all the FTSE 350 sector returns for the first quarter in the years 2008-2017.

The sectors are ranked by average returns in 1Q for the whole period 2008-2017. For example, Banks has been the worst performing sector in the first quarter with an average return of -3.5% in 1Q over the last ten years.

For each year the top (bottom) five sectors are highlighted in blue (red).

Sector returns 1Q [2008-2017] 02

A quick visual inspection shows that there is a certain clustering of blue highlighting at the top of the table and red at the bottom, which suggests that some sectors perform consistently well, or badly, in the first quarter.

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Construction sector 4-month strategy

An investing strategy that exploits a seasonality anomaly of the FTSE 350 construction sector.

The following two charts analyse the monthly seasonality of the FTSE 350 Construction & Material sector [NMX2350]. The charts plot the out-performance of the sector over the FTSE 100 Index.

The chart below plots the average out-performance for each month since 1999. For example, the construction sector has out-performed the FTSE 100 Index in January by any average 2.4 percentage points over the 18 years since 1999. The value for April is negative (-1.3), indicating that on average the construction sector has under-performed the market in that month.

Construction & Materials sector relative to FTSE 100 (average)[1999-2017]The following chart plots the proportion of years that have seen a positive out-performance by the construction sector in each month. For example, the sector has out-performed the market in January in 13 of the last 18 years (i.e. 72%).

Construction & Materials sector relative to FTSE 100 (positive)[1999-2017]

The characteristic that jumps out from this analysis is the relative strength of the construction sector in the four months: January, February, November and December.

Strategy

The above analysis suggests a simple strategy (Construction Sector 4M Strategy) that invests in the Construction sector continuously in the four months from November through to February of the following year and is in cash for the rest of the year (i.e. the remaining eight months).

The following chart plots the value of this strategy if it had been set up in 1999 and run through to today. For comparison also plotted is the value of a buy-and-hold FTSE 100 portfolio (both series are re-based to start with values of 100).

Construction Sector 4M Strategy [1999-2017]

By mid-2017 the FTSE 100 portfolio would have had a value of 113, while the Construction Sector 4M Strategy portfolio would have a value of 625.

A good way to build value!

For reference, the seven stocks in the FTSE 350 Construction and Materials sector are:

  • Balfour Beatty [BBY]
  • CRH [CRH]
  • Ibstock IBST]
  • Kier Group [KIE]
  • Marshalls [MSLH]
  • Melrose Industries [MRO]
  • Polypipe Group [PLP]

Almanac cover - 2018 (small 2)

The above is an extract from the newly published UK Stock Market Almanac 2018.

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Tax paid by FTSE 100 companies

The following chart shows the tax paid by FTSE 100 companies last year. For example, the top payer was Vodafone, which paid £4,008 million tax.

 

FTSE 100 companies tax paid last year [2017]

Observations:

  • In total FTSE 100 companies paid £29 billion in tax last year.
  • The top six payers paid over half the total tax paid.
  • The bottom 30 payers paid just 5% of the total tax paid.
  • The average tax paid by the 100 companies was £300m, while the median tax paid was £108m.
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FTSE 100 and FTSE 250 Quarterly Review – December 2017

After market close on 29 November 2017 FTSE Russell confirmed the following changes to the FTSE 100 and FTSE 250 indices. The changes will be implemented at the close Friday, 15 December 2017 and take effect from the start of trading on Monday, 18 December 2017.

FTSE 100

Joining: Smith (DS) [SMDS], Just Eat [JE.], Halma [HLMA]

Leaving: ConvaTec Group [CTEC], Merlin Entertainments [MERL], Babcock International Group [BAB]

FTSE 250

Joining: BCA Marketplace [BCA], F&C Global Smaller Companies [FCS], Purecircle [PURE], RHI Magnesita [RHIM], TI Fluid Systems [TIFS]

Leaving: Electra Private Equity [ELTA], Nostrum Oil & Gas [NOG], PayPoint [PAY], P2P Global Investments [P2P], Restaurant Group [RTN]

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The Stock Market in December

Since 1970 December and April have been the best two months of the year for shares. Since that year the FTSE All-Share Index has risen in December in 74% of all years and the average month return has been 2.1%. In addition, the volatility of December returns is significantly less than any other month.

As can be seen in the accompanying chart the market has only fallen in December in six years since 1984. But two of those negative-return Decembers were very recent: in 2014 and 2015. Which might have led one to wonder if the stellar record of December for shares was ending. However, last year, in 2016, the strength of the market in December reasserted itself when the FTSE All-Share Index rose 4.9% in the month.

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

However, the solid performance of the market in December is only part of a wider trend, namely that from the end of October shares tend to be strong through to the end of the year. This is a result of the Sell in May effect (aka Halloween effect), where equities are relatively strong over the six-month period November – April. So, the market does have a fair following wind at this time of the year, and then in December shares often become super-charged.

The average December

In an average December, shares have in fact tended to be weak in the first couple of weeks of the month, but then around the tenth trading day shares charge upwards. The last two weeks of December is the strongest two-week period of the whole year (and is often referred to as the Santa Rally), and the three days with the highest average daily returns in the year all occur in this two-week period.

Dividends

While December has been a good month for capital gains, it’s the worst month for income investors with only five FTSE 100 companies paying interim or final dividend payments in the month.

Sectors

The FTSE 350 sectors that have tended to be strong in December are: Electronic & Electrical Equipment, Construction & Materials, and Media; while the weak sectors are: Banks, General Retailers, and Fixed Line Telecommunications.

Diary

Dates to watch this month are: 5 Dec ­ FTSE index quarterly reviews announced, 7 Dec – US Nonfarm payroll report, 19 Dec – FOMC announcement on interest rates, 20 Dec – MPC interest rate announcement, 21 Dec – Triple Witching. And note that the London Stock Exchange will close early at 12h30 on the 22nd and will be closed all day on the 25th and 26th.


Article first appeared in Money Observer

Further articles on the market in December.

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Gold seasonality

Does the price of gold exhibit a monthly seasonality?

[Here we update our previous analysis of gold seasonality.]

On 17 March 1968 the system that fixed the price of gold at USD35.00 collapsed and the price of gold was allowed to fluctuate. Let’s have a quick look at the chart to see how gold has performed since it floated in 1968.

Gold ($) [1968-2017]

Since 1968 when gold floated, its price has grown at a CAGR of 7.7%.

Let’s look now at its monthly seasonality.

The following chart plots the average price returns for gold by month since 1968. For example, since 1968 the average return of the gold price in January has been 1.2%.

Gold($) average monthly return [1968-2017]

And the following chart plots the proportion of months that have seen positive returns. For example, in 60% of years since 1968 gold has had positive returns in February.

Gold($) positive monthly return [1968-2017]

It can be seen that since 1968 gold has on average been strong in February, September and December. The weak months for gold have been March and October.

This profile of behaviour would seem to have some persistency as the same pattern can be seen for the more recent period 2000-2017, for example the following chart plots the average month returns from 2000.

Gold($) average monthly return [2000-2017]

The main new features recently have been the strength of gold in the months January, August and November, and the weakness in December.

Gold and equities

The following chart shows the ratio of the FTSE All Share Index to gold (priced in sterling) since 1968. One can regard the chart as the UK equity market priced in gold.

FTSE All-Share Index - Gold(£) [1968-2017]

The ratio peaked at 18.8 in July 99 and then fell to a low of 2.3 in September 2011. Since 1968 the ratio average is 6.1


Almanac cover - 2018 (small 2)

The above is an extract from the newly published UK Stock Market Almanac 2018.

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