The Stock Market in May

Sell in May?

One of the most famous adages in the stock market is “sell in May”. And often this can be good advice. However, look at the accompanying chart ­ you can see that the UK equity market has actually had positive returns in May for the past four years! Admittedly, last year the FTSE All-Share Index saw a rise of only 0.2%, but that’s still a positive return.

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

In fact, since 1984 the market in May has seen roughly an equal proportion of positive and negative month returns (the proportion of years with positive returns in May is 51%).

So, why does May have a bad reputation for shares, and why is the saying “sell in May” so popular?

One reason can be seen in the chart. Although the proportion of positive and negative month returns in May are roughly equal, it can be seen that the positive returns in May are relatively small, whereas when the market falls in May it can suffer quite a large sell-off. Since 1970 the average market return in May has been -0.5%, which is the third worst record of all months.

The other reason why investors should take note of “sell in May” is that, longer-term, May marks the start of the under-performing half of the year (May through to October); a period over which share performance can tend to be lacklustre.

The average May

In an average May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half.

FTSE 100 v S&P 500

There are some months that the UK market fairly consistently outperforms the US market. May isn’t one of them. In fact, May is the weakest month of the year for the FTSE 100 Index relative to the S&P 500 Index; on average the UK index under-performs the US by 1.3 percentage points in May.

Diary

Coming up in May we have the May Day bank holiday on the 1st (LSE closed), the two-day FOMC meeting starting on the 2nd, US Nonfarm payroll report on the 5th, MPC interest rate announcement on the 11th, and Spring bank holiday on the 29th (LSE and NYSE closed).

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Sell in May (2017)

An update on the Sell in May Effect (also called the Six-Month Effect, or Halloween Effect in the US).

In the six months Nov 2016 to Apr 2017 (Winter period) the FTSE All-Share Index rose 5.2%. Previously, the Index had risen 10.1% over May 2016 to Oct 2016 (Summer period).

The out-performance of the Winter market over the Summer market was therefore -4.9 percentage points, which does not support the Sell in May Effect.

The following chart shows the out-performance of the FTSE All-Share Index in the Winter period over the previous Summer period since 1982.

Outperformance of winter over previous summer market [1982-2017]

In the 17 years since 2000 the Winter market has outperformed the previous Summer market 11 times, with an average out-performance of 4.6 percentage points.

As can be seen in the above chart, while in the longer-term the Sell in May effect is strong, in recent years it has become less reliable.

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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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The Stock Market in April

Historically, April has been one of the best months for equities. Since 1970 the average return for the FTSE All-Share Index in the month has been 2.6%, with positive returns seen in 83% of Aprils in the last 47 years. This is the best record, by quite a margin, for any month in the year. And the strong performance has continued in recent years. Since 2000 the average month return for the index has been 2.0% and, as can be seen in the accompanying chart, the market has only fallen in April in five years since 2000.

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

The average April

The market often gets off to a strong start in the month – the first trading day of April is the second strongest first trading day of all months in the year. The market then tends to be fairly flat for the middle two weeks and then rising strongly in the final week.

Investors need to make the most of April. After this month the market enters a six-month period when equities have tended to tread water (the Sell in May effect).

Sectors

The FTSE 350 sectors that tend to be strong in April are: Electronic & Electrical Equipment, Industrial Engineering, and Personal Goods; while the weaker sectors are Household Goods, Mining, Mobile Telecommunications, and Software & Computer Services.

Stocks

At the stock level, the four FTSE 350 with the best Aril returns over the past ten years are: JD Sports Fashion [JD.], Ashmore Group [ASHM], Aberdeen Asset Management [ADN], and Temple Bar Investment Trust. The shares of all four of these companies have risen every year in April since 2007. The FTSE 350 stocks with the weakest record in April have been: Balfour Beatty [BBY], RELX [REL], and BAE Systems [BA.].

FTSE 100 v S&P 500

This is the strongest month for the FTSE 100 relative to the S&P 500 (in sterling terms), the former out-performs the latter by an average of 1.3 percentage points in April ­ the UK index has out-performed the US index (in sterling terms) in April in 13 of the past 15 years.

Holiday Effect

It’s Easter on the 16th so the LSE will be closed on the 14th (Good Friday) and 17th (Easter Monday). A famous anomaly in stock markets is that prices tend to be strong on the day preceding and the day following a holiday. This effect is strongest in the year around the Easter holiday.


Article first appeared in Money Observer

Further articles on the market in April.

 

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U.S. Tax Day

Tax Day in the United States refers to the day by which individuals must submit income tax returns to the federal government.

In the past Tax Day has moved around a bit, but since 1955 it has been fixed at 15 April. Although there are exceptions due to the close proximity of the Emancipation Day holiday in Washington State D.C. Such that since 2007 when 15 April falls on a Friday then Tax Day is moved to the following Monday, and when 15 April falls on a weekend Tax Day is moved to the following Tuesday.

This year, 2017, 15 April is a Saturday and so Tax Day will be Tuesday, 18 April.

It is probably not too controversial  a claim that most people dislike filling in forms and paying taxes. Could this dislike affect individual investors attitude to risk around the time of Tax Day and. if so. could that in aggregate be sufficient to influence equity returns around this period?

Let’s see…

The following chart plots the proportion of weeks that saw positive returns in the S&P 500 Index for the two weeks before Tax Day and for the one week following Tax Day for all years since 1955. For example, the S&P 500 had positive returns in the week two weeks before Tax Day in 69% of years since 1955.

S&P 500 in weeks around Tax Day [1955-2016] - Positive week returns

As can be seen, over the three-week period there was a moderate decline in the proportion of positive weekly returns.

The following chart looks at the same period and weekly frequency, but plots the average weekly returns.

S&P 500 in weeks around Tax Day [1955-2016] - Average week return

Here we can see relatively high returns two weeks before Tax Day, although this overlaps with the start of April which is usually a strong period for equities anyway. The week leading up to Tax Day is relatively weak, and then there’s something of a small relief(?) rally in the week following Tax Day.

Let’s now focus in on the days around Tax Day.

The following chart plots the proportion of days that saw positive returns in the five days around Tax Day. For example, since 1955 the S&P 500 Index has seen positive returns on Tax Day itself (TD(0D)) in 67% of years.

S&P 500 in days around Tax Day [1955-2016] - Positive day returns

Historically we can see that returns have been depressed leading up to Tax Day, with the strongest returns in the 5-day period seen on Tax Day itself.

The following chart looks at the same period and daily frequency, but plots the average daily returns.

S&P 500 in days around Tax Day [1955-2016] - Average day return

The same behaviour profile can be seen as in the previous chart. The weakest average daily returns in the period have been seen on the trading day two days before Tax Day. While the strongest average daily returns have been on Tax Day itself (with an average daily return ten times the average daily return for all days since 1955).

Conclusion

The results here are not strong, but there is some evidence that equities are relatively weak in the days immediately before Tax Day, but the market is strong on Tax Day itself.

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The Stock Market in March

What can we expect from shares as move into spring? Well, since 1984 the market has had an average return of 0.5% in March, with returns positive in 55% of all years. This ranks March seventh among months of the year for market performance. Although as can be seen in the accompanying chart, negative returns have been seen in March with increasing frequency in recent years.

Average month chart for March [1985-2016]

The general trend for the market in March is to rise for the first three weeks and then fall back in the final week – the last week of March has historically been one of the weakest weeks for the market in the whole year.

Large cap v small cap stocks

Generally, small cap stocks outperform large cap stocks at the beginning of the year, and March marks the final month of the three-month period when the FTSE 250 strongly out-performs the FTSE 100. In March on average the FTSE 250 has out-performed the FTSE 100 by 0.9 percentage points.

Sectors

The sectors that tend to be strong in March are: Aerospace & Defense, Financial Services, General Retailers, Industrial Engineering, and Oil & Gas Producers, Oil Equipment. While weak sectors have been: Gas, Water & Multiutilities, Health Care Equipment & Services, and Nonlife Insurance.

Stocks

While, for stocks, the FTSE 350 shares that have performed the best over the last ten years in March are: Clarkson [CKN], Petrofac Ltd [PFC], and Intertek Group [ITRK], while the weakest shares have been Vectura Group [VEC], Renishaw [RSW], and Lancashire Holdings Ltd [LRE].

March is the busiest month of the year for FTSE 100 companies paying dividends. And it’s also a busy month for company announcements: the busiest for FTSE 250 companies in the year with 71 companies announcing their prelims this month (along with 24 FTSE 100 companies).

Aside from stocks, March has often been a weak month for gold and a strong month for oil.

The results of the quarterly FTSE 100 index review will be announced on the 1st; at the time of writing Capita and Dixons Carphone look candidates to be booted out, replaced by Scottish Mortgage IT and Weir Group.

Diary

Elsewhere on the diary front we have: 3rd – Nonfarm payroll report, 14th – Two-day FOMC meeting starts, 15th – Chancellor’s Budget, 16th – MPC interest rate announcement, 17th – Triple Witching, 20th – FTSE Index series quarterly changes effective, 26th – Daylight Saving Time starts.


Article first appeared in Money Observer

Further articles on the market in March.

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The Stock Market in February

Since 1970 the average month return of the FTSE All-Share Index in February has been 1.6%, with the month seeing positive returns in 64% of years. But a glance at the accompanying chart will show quite how strong the market has been in February in recent years.

Since 2009 the market has been up every February, and since 1994 market has only seen significant negative returns in three years. There’s no obvious reason why the market has been so strong in recent years in this month; although one possible explication might be that, also in recent years, shares have been weak in January and so they experience a bounce back rally in February.

Average month chart for February [1985-2016]

In an average February shares tend to rise strongly on the first trading day, then trade flat for a couple of weeks, before gaining strongly in the middle of the month and finally drifting off slightly to month end.

Mid-cap outperform large-cap stocks

A feature of February is that, with January, it is the best month for mid-cap stocks relative to the large caps. Since 2000 on average the FTSE 250 Index has out-performed the FTSE 100 Index by 1.6 percentage points in this month, and in that time the large cap index has underperformed mid-caps in February in only four years.

FTSE 100 outperforms S&P 500

On the international front, February is one of the four months in the year that the FTSE 100 Index has historically out-performed the S&P 500 Index. Since 1999 the UK index has underperformed the US index in Fenruary in only three years. Although the out-performance is somewhat attenuated once currency is taken into account as GBPUSD is historically weak in February.

Stocks

In the last ten years FTSE 350 shares that tended to be strong in February are: Hunting [HTG], Provident Financial [PFG], and Anglo American [AAL]. While shares that have tended to be weak in the month are: AstraZeneca [AZN], Workspace Group [WKP], and Vectura Group [VEC]

It’s a busy month for analysts as there are more FTSE 100 results announced during the month than any other ­ 36 companies announce their prelims in February (as do 55 FTSE 250 companies).

Aside from shares historically this has been a strong month for gold and silver.


Article first appeared in Money Observer

Further articles on the market in February.

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A very average start to 2017

The following chart plots the daily returns of the FTSE 100 Index for the nine days around Christmas and New Year.

The blue bars plot the average daily returns of these days for the period 2000-2016. The orange bars plot the daily returns for the last nine days.

FTSE 100 Index daily returns around Christmas and New Year [2017]

As can be seen the actual daily returns for the last nine days have been on the whole pretty close to the average daily returns seen for the last 16 years..

  • Strong returns have been seen on the trading days following Christmas and New Year.
  • After the first day after New year, returns have trailed off (days 8 and 9 in the chart).
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The Stock Market in January

The performance of the stock market in January has changed dramatically over time. From 1984 to 1999 the average FTSE All-Share return in the month was 3.3%, and as can be seen in the accompanying chart in those 16 years the market only fell twice in January. But then things changed completely. Since year 2000 the average market return in January has been -1.6% with the market seeing positive returns in only six years. This makes January the worst of all months for shares since 2000.

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

In an average January, the euphoria of December (the second strongest month of the year) carries over into the first few days of January as the market continues to climb for the first couple of days. But by around the fourth trading day the exhilaration is wearing off and the market then falls for the next two weeks – the second week of January is the weakest week for the market in the whole year. Then, around the middle of the third week, the market has tended to rebound sharply.

January Effect

In the world of economics the month is famous for the January Effect. This describes the tendency of small cap stocks to out-perform large caps in the month. This anomaly was first observed in the UK, but it certainly seems to apply to the UK market as well. For example, since 1999 the FTSE Fledgling index has out-performed the FTSE 100 Index in January in every year except two. The interesting thing is those two weak years for small-caps were seen in January in the last two years – 2015 and 2016. Is this effect on the wane?

Turning to the longer-term, what is the outlook for the rest of the year?

Outlook for 2017

One of the strongest influences on the US stock market is the four-year Presidential Election Cycle. Historically presidents have primed the economy in the year before elections, resulting in the third year of the Presidential Election Cycle seeing higher annual market returns. By contrast, the first (which will be 2017 in this cycle) and second years have seen lower than average returns. Given the close correlation of the US and UK markets this would suggest a somewhat negative outlook for UK shares in 2017.

What other patterns can we find from history for the likely performance of the market in 2017? Well, we could look at the decennial cycle. Since 1800 the average annual return in the seventh year of the decade has been a reasonable 2.7%; but since 1950 the seventh years have been on quite a run: the average annual return has been 16% and the last time the market fell in a 7th year was 1957. The guidance from the centennial cycle is mixed; in 1717, 1817 and 1917 the respective annual returns for the UK market were +18%, +5%, -11%. In the Chinese calendar, it will be the year of the rooster, this is not a good sign for stocks. Since 1950, rooster years are the only Chinese zodiac years that have had a negative average annual return (of -4%). So, good luck if you are trading against the rooster!


Article first appeared in Money Observer

Further articles on the market in January.

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Average market behaviour in January

The following chart plots the average performance of the FTSE 100 Index during January since 1984.

Average month chart for January [1985-2016]

As can be seen, historically the market tends to rise for the first two or three days in January and then sells off quite strongly over the following two weeks. The second week of January is the weakest week for the market in the whole year. Then, around the middle of the third week, the market has tended to rebound sharply.


Other articles about the market in January.

 

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