Oil and the stock market

1. Oil price

The following chart plots the US dollar price of oil from 1971 to today.

West Texas Intermediate ($) [1971 - Nov 2014]The following chart plots the same data but on a log scale.

West Texas Intermediate ($) [1971 - Nov 2014] log scaleOn this second chart the proportionate fall in the oil price recently can be seen more clearly.

2. Oil price $ v £

The following chart plots the US dollar price of the oil against the price in sterling; both data series have been re-based to start at 100.

West Texas Intermediate ($ v £) [1971 - Nov 2014] - rebased to 100Since 1971 the oil price has risen 1,758% in US dollars, and 2,771% in sterling.

3. The stock market priced in oil barrels

The following chart plots the FTSE All Share Index priced in oil barrels (i.e. FTSE All Share Index divided by the oil price in sterling).

FTSE All Share-West Texas Intermediate (£) [1971 - Nov 2014]The current level of the of the ratio is 85.0, which is pretty close to the average of 88.3 for the period since 1971.


UK Stock Market Almanac cover [160 x 240]

The most recent edition of the UK Stock Market Almanac has just been published.

Order your copy now!

 

Social Share Toolbar

Monthly seasonality of gold

On 17 March 1968 the system that fixed the price of gold at USD35.00 collapsed and the gold price was allowed to fluctuate. The following chart shows the dollar price of gold since that time.

Gold ($) [1968-2014]Monthly seasonality

The following chart shows the average returns by month of gold($) for the period 1968-2014.

Gold ($) month returns average [1968-2014]And the chart below has similar parameters but it shows the proportion of monthly returns that were positive for each month.

Gold ($) month returns positive [1968-2014]Observations:

  1. Gold($) has been strong in the months of February, September and November
  2. Gold($) has been weak in the months of March and October.

Since 1968 the month with the highest volatility has been January, while the lowest has been April.

 

Social Share Toolbar

Daily volatility of the FTSE 100 Index

October has a reputation for being a volatile month for shares – is this in fact true?

Daily volatility within a year

The standard way to measure volatility is to calculate the standard deviation of returns (in this case these will be daily returns). The following chart plots the standard deviation of the daily returns of the FTSE 100 Index for each trading day of the year for the period 1984 to 2014. For example, the standard deviation of the 30 daily returns on the first trading day of the year since 1984 is 1.37. To smooth the line what is actually plotted is the 5-day rolling  average of the daily standard deviations.

Volatility of daily returns of FTSE 100 Index [1984-2014]It can be seen that the volatility of daily returns fluctuates in a range of approx 0.8-1.2 for the first eight months of the year. It then starts to increase in September and peaks in October before trailing off for the remainder of the year. So, according to this study of daily returns throughout the year, October is indeed the most volatile month.

Daily volatility over 30 years

Having looked at the daily volatility profile for the 12 months of the year, let’s now look at how daily volatility has changed over the past three decades.

The chart below plots the standard deviation of daily returns of the FTSE 100 Index on a 50-day rolling basis for the period 1985-2014.

Volatility of daily returns of FTSE 100 Index (50-day rolling average) [1985-2014]Over the past three decades there have obviously been periods that saw great spikes in volatility (notably: Black Monday in 1987, the sell-off in 2002, and the credit crunch in 2008).

However, overall levels of daily volatility have not changed greatly over the period. The (50-day rolling) average daily volatility since 1985 is 0.99 and currently stands a bit below that at 0.83. As can be seen, since the spike in daily volatility in 2008, the trend of daily volatility has been down – reverting to the mean daily volatility for the period.

At the time of writing, the 50-day rolling average daily return is 0.058% with a  standard deviation of 0.83. This means that in the past 50 days, 16 days (32% of the days) have seen daily changes more than +51 or less than -57 points in the FTSE 100.

 

Social Share Toolbar

Monthly seasonality of GBPUSD

For a while after World War II nobody needed to worry about currency fluctuations because currencies were tied to the US dollar under the Bretton Woods system. Exchange controls were in place and some older readers may remember being restricted to taking no more than £50 out of the UK.

But on 15 August 1971 President Nixon announced that the US was ending the convertibility of the US dollar to gold and this led to the end of the Bretton Woods system and fixed-rate currencies – such as sterling – became free-floating.

The following chart shows the fluctuations of GBPUSD since it became free-floating in 1971.

GB sterling/US dollar (GBPUSD) rate [1971-2014]

As can be seen, in the decade following 1971 sterling fell against the dollar (almost reaching parity in February 1985); but since then has been broadly trading in the range 1.4-2.0.

Monthly seasonality

The following charts show the monthly changes in GBPUSD for the last 20 years.

The chart below shows the average monthly returns for GBPUSD. For example, on average the rate has fallen 0.39% in January.

GBPUSD month returns average [1993-2014]The chart below shows the proportion of monthly returns that were positive. For example, GBPUSD has risen in January in 46% of years since 1993.

GBPUSD month returns positive [1993-2014]Observations:

  1. Weak months for GBPUSD have been: February, May, August and November
  2. Strong months for GBPUSD have been: April, September and October

These observations would seem to have some persistency as they are valid for other periods analysed: 1971-2014 and 2000-2014.

Social Share Toolbar

Sell in May (risk-adjusted returns)

The Sell in May effect (also known as the Halloween or Six Month effects) describes the tendency of the stock market to perform strongly in the period November to April in comparison to the period May-October. This effect has been observed in markets worldwide and has existed for many decades.

The following charts analyse this effect by looking at the performance of three portfolios:

  1. All Year portfolio – this portfolio is 100% invested in the FTSE All Share Index all year round
  2. Winter portfolio – is 100% invested in the FTSE All Share Index only in the months November to April (and is out of the market for the other half of the year).
  3. Summer portfolio – is 100% invested in the FTSE All Share Index only in the months May to October (and is out of the market for the other half of the year).

Cumulative returns

The following three charts plot the performance of the three portfolios to the present day from 1984, 1994 and 2004.

 

Sell in May (1984-2014)

Sell in May (1994-2014)Sell in May (2004-2014)As can be seen the divergence in performance between the Winter and Summer portfolios is quite remarkable.

CAGR

The following chart partly summarises the performance by plotting the CAGR (compound annual growth rate) for the portfolios over the three periods.

Sell in May (CAGR) [2014]The two features to note are the CAGR for the Winter portfolio is greater than the CAGR for the All Year portfolio for all three periods, and that the CAGRs for the Summer portfolio are negative for all three periods studied.

Volatility

The following chart shows the volatility of the three portfolios over the three periods. In this case volatility is calculated as the standard deviation of the portfolio daily returns.

Sell in May (Volatility) [2014]The features to note here are that the Winter portfolio consistently has the lowest volatility in each period, while the Summer portfolio has the highest. An explanation for this might be that the most volatile period of the year for the stock market has historically been September-October.

So, beyond superior returns, a feature of the Winter portfolio is that it avoids the most volatile period of the year..

Sharpe Ratio

The following chart to some extent combines the previous two into one by plotting the Sharpe Ratio for the three portfolios over the three periods. The Sharpe Ratio is one method of measuring the risk-adjusted returns of a portfolio.

Sell in May (Sharpe Ratio) [2014]With its superior returns and lower volatility the Winter portfolio can be seen to quite easily have the highest Sharpe Ratios for all three periods studied.


 

Other articles on the Sell in May effect.

 

Social Share Toolbar

Long-term performance of emerging markets

Hurrah! The latest Credit Suisse Global Investment Returns Yearbook (for 2014) has just been published. This is one of the two essential annual publications for investors (the other is the Barclays Equity Gilt Study – references at the end of this article).

This year’s Yearbook looks at three topics: emerging markets, the relationship between economic growth and stock returns, and a behavioral bias of investors. In this article we’ll look briefly at the first.

Creating a long-term emerging markets index

The first index of emerging markets appeared in 1985; so the first task of the Yearbook’s authors was to back-calculate a longer-term index (from 1900). To do this they observed that in 2010 the general rule the index compilers (i.e. S&P, FTSE, MSCI) followed was that developed markets were defined as those with a GDP per capita above $25,000 (and markets below this level were categorised as emerging).

Inflation-adjusting this threshold, they back-calculated which countries would have been considered emerging in each year since 1900. From this they calculated a weighted index of these stock markets (adding new markets to the index in the years that the historic data became available).

Comparing the performance of emerging and developed markets

From their created index they were able to compile the following chart, which compares the relative performance of emerging and developed markets since 1900.

Long-run emerging and developed market returns (1900-2013)The figures show that the annualised return for a 144-year investment in emerging markets would have been 7.4%, against a comparable return of 8.3% in developed markets. The authors point out that a large reason for the under-performance of the emerging markets was the disastrous performance of the Japanese  and Chinese markets in the 1940s.

Looking at the period from 1950, the performance is a little more what one would expect: the annualised return of the emerging markets has been 12.5% against 10.8% for the developed markets.

The following chart compares the emerging and developed markets performance by decade since 1900.

Emerging and developed markets - returns by decade (1900-2013)The chart highlights the recent volatility of emerging market performance. The decade 2000-2010 was the best decade for emerging markets relative to developed markets; whereas the current decade so far has been the third worst.

Volatility

We take it as a given that emerging markets are volatile. And the report finds that in 1980 the average emerging market was almost twice as volatile as the average developed market. However, since 1980, emerging market volatility has been steadily falling, such that by 2013 the average emerging market was only 10% more volatile than the average developed market.

Correlation

The report goes on to study the (increasing) correlation between emerging and developed markets, which thereby reduces the benefits of diversification.

In conclusion, the authors observe that 30 years ago emerging markets made up 1% of world equity market capitalisation and 18% of GDP, today the comparable figures are 13% and 33%. They forecast that these figures will continue to grow – making emerging markets impossible to ignore.


Reference

 

Social Share Toolbar

Chinese New Year – year of the horse

When we look at the annual performance of the stock market we usually take our start and end points as 1 January and 31 December. For example, a long-term chart of an index will normally plot the index values on 31 December for each year.

But using different start and end points may be interesting. While the overall performance of the market will obviously not change, the path to the final point may show up differently, and thus possibly reveal a pattern of behaviour not previously noticed.

This week sees the start of the Chinese New Year on 31 January. The start of the Chinese Year moves around (on the Western calendar) from year to year, but always falls between 21 January and 21 February. The calculation of the actual date of the Chinese New Year is sinologically complex. For example,

Rule 5 In a leap suì, the first month that does not contain a zhongqì is the leap month, rùnyuè. The leap month takes the same number as the previous month.

That quote comes from a 52-page academic paper, The Mathematics of the Chinese Calendar (Aslaksen, 2010). However, we shall skip lightly over such details and focus on a key aspect of the Chinese calendar which is the sexagenary cycle. This is a combination of 10 heavenly stems and the 12 earthly branches. The branches are often associated with the sequence of 12 animals (at last – the animals!) Cutting to the chase, the Chinese calendar encompasses a 12-year cycle where each year is associated with an animal.

Can we detect any significant behavioural patterns in the stock market correlated with the sexagenary cycle? In other words, are there monkey years in the market?

The following chart plots the average performance of the S&P 500 Index for each animal year since 1950. For example, Ox years started in 1961, 1973, 1985, 1997, 2009; and the average performance of the market in those (Chinese) years was +14.0%.

Chinese calendar and S&P 500 average annual returns (1950-2013) As can be seen the best performing market animals have been the goat and dog. And, coincidentally (or is it!), the worst performing animals have been the rooster (perhaps a mistranslation of turkey?) and snake (snakes and ladders…).

The Chinese New Year starting this week is the year of the horse, in which the S&P 500 has had an average annual return of 6.7% since 1950.

Reference

Helmer ASLAKSEN, The Mathematics of the Chinese Calendar, 2010

Social Share Toolbar

FTSE 100 Index (1984-2013) – price performance

To quickly recap a previous post, the FTSE 100 Index was launched in 1984 with a value of 1000 and closed 2013 at 6749. This is an increase of 575% over the 30 years, giving an annual growth of 6.57%.

Trendline

The following chart shows the price performance of the FTSE 100 Index 1984-2013. A simple linear trendline has been added.

FTSE 100 Index [1984-2013] with trendlineThe trendline calculates a value of 6695 for the end of 2013, which is just 54 points away from the actual value (less than 1% difference). As can be seen in the chart, the FTSE 100 Index is pretty much bang on its long-term (since 1984) trend.

Inflation-adjusted

The following chart plots the FTSE 100 Index against the real index (inflation-adjusted) for 1984-2013.

FTSE 100 inflation-adjusted [1984-2013]Inflation-adjusted the FTSE 100 Index closed 2013 at 2304 – an increase of 130.4% on the starting value 30 years ago, an average annual growth rate of 2.8%.

Comparison with S&P 500 and gold

The following chart plots the FTSE 100 Index against the S&P 500 Index and gold. The three series have been re-based to start at 100 for ease of comparison.

FTSE 100 v S&P 500 v GOLD [1984-2013]The above chart is not that useful as the S&P 500 Index and gold are both priced in dollars, so the following chart plots them in sterling terms against the FTSE 100 Index.

FTSE 100 v S&P 500(£) v GOLD(£) [1984-2013]

Social Share Toolbar

FTSE 100 Index – 30 years old today

The FTSE 100 Index was launched on 3 January 1984. The market capitalisation weighted FTSE 100 index replaced the price-weighted FT30 Index as the performance benchmark for most investors.

Price performance

The following chart shows the price performance of the FTSE 100 Index 1984-2013. A simple linear trendline has been added.

FTSE 100 Index [1984-2013] with trendlineThe index was launched in 1984 with a value of 1000 and closed 2013 at 6749. This is an increase of 575% over the 30 years, giving an annual growth of 6.57%.

The trendline calculates a value of 6695 for the end of 2013, which is just 54 points away from the actual value (less than 1% difference). As can be seen in the chart, the FTSE 100 Index is pretty much bang on its long-term (since 1984) trend.

Fascinating Footsie Facts

Number of companies in index 100
Market capitalisation, average (£m) 18,253
Market capitalisation, standard deviation 24,837
Share price, average (£) 12.93
Number of companies paying a dividend 96
Dividend yield, average (%) 2.92
Dividend yield, standard deviation 1.29
PE ratio, average 20.2
PE ratio, standard deviation 14.2
PEG, average 2.3
Turnover, average (£m) 14,674
Turnover growth last five years, average (%) 76.2
Turnover to capitalisation ratio, average 0.88
Number of companies making a profit 94
Profit, average (£m) 1,534
Profit growth last five years, average (%) 101.6
Profit / turnover, average (%) 16.9
Current ratio, average 1.29
Net cash, average (£m) 5838
Net cash, sum total (£m) 566,363
Price to net cash ratio, average 24.2
Net borrowings, average (£m) -1710
Net borrowings, sum total (£m) -165,902
Net gearing, average 1.00
Interest cover, average 70.0
ROCE, average (%) 50.1
ROCE, standard deviation 107.6

Original constituents

The following table shows the 30 original companies that are still in the Index today. (The 19 italicised companies have been in the index continuously since launch.)

Company TIDM
Associated British Foods
Aviva
British American Tobacco
Barclays
BAE Systems
BP
GlaxoSmithKline
GKN
Hammerson
Imperial Tobacco Group
Johnson Matthey
Land Securities Group
Legal & General Group
Lloyds Banking Group
Marks & Spencer Group
Pearson
Prudential
Reckitt Benckiser Group
Reed Elsevier
Rexam
Rio Tinto
RBS Group
RSA Insurance Group
J Sainsbury
Royal Dutch Shell
Smith & Nephew
Standard Chartered
Tesco
Unilever
Whitbread

Largest companies

The following table compares the market capitalisations of the top five largest companies in the index in 1984 and today.

Rank (1984) Capital (£m) Rank (2013) Capital (£m)
1 British Petroleum Co. 7401 Royal Dutch Shell 140,695
2 Shell Trans. & Trad. Co. 6365 HSBC Holdings 124,728
3 General Electric Co. 4915 Vodafone Group 114,860
4 Imperial Chemical Industries 3917 BP 90,984
5 Marks & Spencer 2829 GlaxoSmithKline 78,252

Oil is still there today, but industrial, chemical and retail stocks have been replaced by bank, telecom and pharmaceutical stocks.

In 1984 the total market capitalisation of the index was £100 billion; at the end of 2013 the market capitalisation had grown to £1,824 billion.

It’s interesting to note that Shell’s market cap. today is 40% larger than the whole FTSE 100 Index in 1984.

Other references

FTSE 100 at 30 article in the Telegraph  by Martin Vander Weyer.

Social Share Toolbar