Sell in May (2017)

It’s sell in May time again! 

And time for many articles appearing on whether to actually sell in May or not. So, should one sell?

The issue is a little tricky. It is certainly the case that equities over the 6-month period May to October tend to under-perform the November to April period. (We have covered this in many previous posts.)

However, just because the market under-performs May-October doesn’t necessarily mean that the market experiences negative returns over these summer months.

The following chart plots the 6-month May to October returns for the FTSE All-Share Index since 1982.

Market returns May to October [1982-2016]

As can be seen, since 1982 the market has actually risen more often than it has fallen over the May to October period –  equities have had positive returns in 20 of the past 35 years. The market has risen in ten of the last 14 years. And last year, 2016, the FTSE All-Share increased 10.1% May to October.

So, the case is not necessarily looking strong to sell in May. Especially, if one adds in the argument that being out of the market an investor will forego any dividend payments over the May-October period (and at a time when interest rates are very low).

An argument in favour of selling might be that, although the market often sees positive returns in the period, when the market does fall, the falls tend to be quite large. So, since 2000, the average return May-Oct has been -1.1%. Admittedly, this is quite heavily influenced by the fall in 2008, which might be regarded as something of an anomaly. But over the longer periods, the average returns are negative as well (-0.1% from 1982, and -1.0% from 1972).

In conclusion, whether to sell in May should likely depend on an individual’s attitude to risk and their transaction costs.


Further articles on sell in May.

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100 years of the FTSE All-Share Index since 1917

The following chart plots the annual returns of the FTSE All-Share Index for the 100 years from 1917 to 2016.

One Hundred Years of the FTSE All-Share Index [1917-2016]

The final bar in the chart plots the annual return for the index in 2016 (+12.3%). The Y-axis is truncated at +/-50% for legibility. In two years the returns were outside this bound: in 1974 the index fell 55%, and in 1975 the index rose 136%.

Over the 100 years since 1917 the average annual return for the index has been +7.0%.

The standard deviation has been 21.5, which means that for 66% of the years the return was between -14.5% and +28.5%.

The index saw positive returns in 65 of the 100 years.

The following chart is similar to the above, but ranks the returns in order of size.

One Hundred Years of the FTSE All-Share Index - ranked by return [1917-2016]

The return of 12.3% in 2016 ranks 35th in order of annual returns for the index in the last 100 years.

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Monthly seasonality of oil

Does the price of oil display a seasonality pattern?

[We last looked at this in 2014 in this article; time to update the figures.]

To briefly recap, the original study found that since 1986 the price of oil displayed a seasonality for two parts of the year-

  • March-September when WTI is strong, and
  • October- February when the WTI price has been relatively weak

Let’s see if this is still the case.

Mean returns

The following chart plots the average month returns of the price of WTI (West Texas Intermediate) for the period 2000-2016.

Crude Oil (WTI) [2000-2014] Monthly return average

A two-part pattern for the year is still observable, but the periods have shifted slightly.

As can be seen, since 2000, WTI month returns have tended to be high in the period February to June. The strongest month of the year in this period has been February with an average return in the month of 4.8%.

The weak part of the year has also shifted: to September to January. The weakest month has been November, with an average price return of 3.2%.

Positive returns

The following chart plots the  proportion of monthly returns that were positive over the same period.

Crude Oil (WTI) [2000-2014] Monthly return positive

This pattern of positive returns largely supports the preceding analysis.

Since 2002 WTI has seen negative returns in February in only 3 years.

By contrast, September has seen positive returns in only 6 years since 2000.

The new seasonality pattern can thus be summarised as-

  1. February-June when WTI is strong, and
  2. September-January when the WTI price has been relatively weak

Cumulative performance

The following chart plots the cumulative performance of WTI for two portfolios:

  1. WTI (Strong Months) – this holds WTI in just the strong months identified above (February-June), and is in cash for the rest of the year
  2. WTI (Weak Months) – this holds WTI in just the weak months (September-January), and is in cash for the rest of the year

For benchmarking purposes WTI (continuous holding) and the S&P 500 Index are also plotted. All series are re-based to start at 100.

WTI Seasonality Performance [2000-2016]

Starting at 100 in 2000, the WTI (Weak Months) portfolio would have fallen to a value of 16 by 2016. The S&P 500 would have a value of 145, and a continuous holding in WTI a value of 182. But the WTI (Strong Months) portfolio would today have a value of 1047.


Further articles on oil.

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US Democrat/Republican president portfolios

Market performance by president

The chart below shows the performance of the UK market (FT All-Share index) over the periods the respective US presidents were in office.

FT All-Share return over US presidential terms

From the point of view of the UK market the best president was Jimmy Carter – the market rose 145% during his 4 years as president. The worst spell was the second term Richard Nixon when the market fell 42%.

Market performance by party of the president

The chart below plots the values of two simulated portfolios both starting with a value of 100 at the 1948 US presidential election:

  • Democrat portfolio: only invests in the UK stock market when there is a Democrat in the White House, and is in cash when the president is a Republican.
  • Republican portfolio: reverse of the above.

Democrat v Republican FTSE All Share Portfolios

The two portfolios have largely tracked each other closely until the 2008 election of Barack Obama. From this period, the Democrat portfolio performed strongly, such that by 2016 this portfolio had a value of 1344 compared with a value of 639 for the Republican portfolio.


See also: other articles on politics and markets.

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UK equities and the US presidential election cycle

The chart below shows the 4-year US presidential election cycle (PEC) superimposed on the FT All-Share index from 1956. The vertical bars indicate the timing of the November elections every four years.

FT All-Share Index and 4-year US election cycle

It can be seen that on occasions the US presidential election has (approximately) coincided with significant turning points in the UK market; notably those elections in 1960, 1968, 1972, 1976,2000, and 2008.

Returns in each year of the PEC

The following chart shows the average annual returns for the FT All-Share Index for each of the four years in the US presidential election cycle. PEC(1) is the first full year after a presidential election, PEC(4) is the election year.

FTSE All-Share and 4-yr PEC (annual returns)

Typically, presidents have primed the economy in the year before elections [PEC(3)] – or, at least, stock markets have expected them to do so.

And the following chart plots the proportion of years that saw positive returns in each of the four years in the PEC.

FTSE All-Share and 4-yr PEC (positive returns)

For the 15 presidential cycles from 1948 to 2008, the FT All-Share Index saw positive returns in every third year of the cycle. But in the two cycles since 2008, the Index has had negative returns in PEC(3).

US presidential election data

For reference below is data on the US presidential elections since 1948.

Election date Elected President Party Popular vote(%) Electoral vote
02 Nov 1948 Harry Truman Dem 49.6 303
04 Nov 1952 Dwight Eisenhower Rep 55.2 442
06 Nov 1956 Dwight Eisenhower Rep 57.4 457
08 Nov 1960 John Kennedy Dem 49.7 303
03 Nov 1964 Lyndon Johnson Dem 61.1 486
05 Nov 1968 Richard Nixon Rep 43.4 301
07 Nov 1972 Richard Nixon Rep 60.7 520
02 Nov 1976 Jimmy Carter Dem 50.1 297
04 Nov 1980 Ronald Reagan Rep 50.7 489
06 Nov 1984 Ronald Reagan Rep 58.8 525
08 Nov 1988 George H. W. Bush Rep 53.4 426
03 Nov 1992 Bill Clinton Dem 43.0 370
05 Nov 1996 Bill Clinton Dem 49.2 379
07 Nov 2000 George W. Bush Rep 47.9 271
02 Nov 2004 George W. Bush Rep 50.7 286
04 Nov 2008 Barack Obama Dem 46.2 365
06 Nov 2012 Barack Obama Dem 48.1 332

See also: other articles on US elections

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Equities in US presidential election years

The 14 charts below show the performance of the FTSE All-Share index over the 12 months of a US presidential election year. For example, the first chart shows the January-December performance of the UK market in 1960, the year John Kennedy was elected President of the United States. The dashed line in each chart indicates the date of the election.

Market in US presidential elections years

Historically, the UK market tends to rise in the few weeks leading up to the election.

The following chart plots the annual returns of the FT All-Share Index in years of US presidential elections.

FT All-Share annual returns in US presidential years


See also:

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FTSE 250/100 Ratio

The following chart shows the ratio of the FTSE 250 Index divided by the FTSE 100 Index since 1985. For example, yesterday’s close for the FTSE 250 Index was 18,342.1 and for the FTSE 100 Index it was 7074.3; dividing the former by the latter gives a ratio value of 2.59 (the last value plotted on the chart).

FTSE 250-100 Ratio [1985-2016]

As can be seen, the ratio fluctuated in a sideways range from 1985 to 1999. And then the great out-performance of the FTSE 250 over the FTSE 100 began (on 18 Jan 1999 to be precise).

Over the following 16 years to today, while the FTSE 100 Index increased 16%, the FTSE 250 gained 274%.

The following chart zooms in to show the FTSE 250/100 ratio for the more recent period since 21012-2016.

FTSE 250-100 Ratio [2012-2016]

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UK interest rate cycle

Previous articles have looked at the Bank of England’s bank rate. For a brief recap, the chart below plots the level of the bank rate since 1901.

Bank of England Base Rate [1901-2016]

When growth in an economy is thought to be too low, interest rates may be reduced to increase consumption and investment. However, at a certain stage low interest rates may lead to inflation with over-investment in property and other assets. At this point, to limit inflation, interest rates may be raised.

This cycle of interest rates increasing and decreasing is roughly related to the economic cycle: low growth leads to lower interest rates, and high growth leads to higher interest rates.

When central banks are lowering interest rates this is often referred to as the easing phase of the interest rate cycle; when rates are being raised this is the tightening phase of the cycle.

For the purposes of the study here, rates are said to be in an easing phase if the previous rate change was down. They stay in this phase until a positive rate change occurs, at which point rates move into a tightening phase.

The following chart reproduces the first chart but overlays vertical bars to highlight the tightening phase of the interest rate cycle (i.e. periods when the bank rate is being increased). The periods without grey bars are therefore easing phases.

UK interest rate cycle [1901-2016]

The following table gives a summary of the length of time the base rate stayed in the respective phases.

Period Market Days Easing Tightening
1901-1969 17,995 70% 30%
1970-1999 7,590 59% 41%
2000-2016 3,994 74% 26%
1901-2016 29,579 68% 32%

Over the whole period rates stayed in an easing phase (68%) for twice as long as they did in a tightening phase (32%).

The following chart is similar to the above, but zooms into the shorter time period: 1970-2016.

UK interest rate cycle [1970-2016]

It can be seen that before 1988 monetary policy changed direction frequently (i.e. the average interest rate cycle was short). After 1988, monetary policy settled down and the interest rate cycle became much longer.

For example, in the five years, 1983-1988, there were seven full rate cycles (i.e. an easing phase followed by a tightening phase), the same number as occurred in the 28 years since 1988.

For reference, the following chart overlays the FTSE All-Share Index on the BoE base rate.

BoE base rate v FTSE All-Share Index [1970-2016]

It can be seen that the period of great credit expansion that occurred 1980-2000 was accompanied by an overall decline in interest rates from 17% to 5%.

The following chart (crudely) shows what happened to equities over this period during the discrete periods of interest rates being eased and tightened.

  • The green line plots the value of a portfolio that invested in the equity market only during the easing phase of interest rates.
  • The blue line plots the value of a portfolio that invested in the equity market only during the tightening phase of interest rates.

The red line plots a simple buy-and-hold market portfolio. All portfolio values start at 100.

Interest rate cycle and equities

By 2016 the Easing Portfolio had a value of 986, while the Tightening Portfolio a value of 228. Obviously some of this difference in performance is attributable to the fact that the Easing Portfolio was invested in the market for twice as long as the Tightening Portfolio.

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UK bank rate changes since 1694

A previous article looked at the history of the official bank rate since 1694.

Here we will analyse all the discrete changes made to the bank rate since 1694.

Since 1694 the Bank of England has made 828 changes to the bank rate. Changes to the bank rate today are recommended by the Monetary Policy Committee (MPC), which meets once a month to consider changes to the bank rate (more info on the MPC).

The following chart plots all the changes to the bank rate from 1694. The size of each respective change is shown on the Y-axis. (NB. the Y-axis is truncated at plus and minus 3 for legibility; in 1914 the rate did see changes of +4 and -4.)

BoE bank rate changes [1694-2016]

As can be seen, until the beginning of the 20th century the great majority of rate changes were +/- 0.5 and +/- 1. And also the balance of the size of positive and negative rate changes was roughly equal.

Towards the end of the 20th century the Bank started experimenting with larger and smaller increments of change. And the balance of rate changes also changed: periods of small negative changes would be interrupted by larger positive rate adjustments.

In 1982 the Bank began a cautious period of frequent rate reductions of just 0.125 (the smallest rate reduction up to this time). The last time the bank rate was reduced by such a small amount was in 1989.

The frequency distribution of size of rate changes is shown in the following chart.

Distribution of BoE bank rate changes [1694-2016]

As can be seen, the most common rate change has been a reduction of half a percentage point. (Since 1694 33% of all rate changes have been for -0.5.) After that the most frequent rate change was plus one percentage point.

The above chart supports the (well-known) observation that rates are reduced cautiously with small increments and increased with more aggressive, larger increments.

The following chart breaks this frequency distribution down by century.

Distribution of BoE bank rate changes (by century) [1694-2016]

The above chart supports the previous observation that, whereas in the 19th century the Bank restricted its changes to a narrow band of increments, in the 20th century the size of the rate changes were more dispersed.

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