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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The Stock Market in December

From the end of October shares tend to be strong through to the end of the year. This is partly 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.

Since 1970 December and April have been the best two months of the year for shares. Since then the FTSE All-Share Index has risen in December in 74% of all years and the average month return has been 2.1%.

Monthly returns of FTSE All Share Index - December (1984-2015)

As can be seen in the above chart the market has only fallen in six years since 1984. However, two of those negative December returns occurred in the last two years, 2014 and 2015. Which does raise the interesting prospect that December’s long-established pattern of strength in December may be changing.

An average December

In an average December, shares have in fact tended to be weak in the first couple of weeks, 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).

Internationally, one could mention that December is one of the few months of the that the FTSE 100 Index has on average out-performed the S&P 500.

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.

Shares

FTSE 350 shares that have tended to be strong in December are: Ashtead Group [AHT], Balfour Beatty [BBY], and William Hill [WMH] ­ these three shares have risen every December for the past ten years. While the shares that have historically been weak this month have been: Debenhams [DEB], Marks & Spencer Group [MKS], and Rank Group [RNK]

Diary

Dates to watch this month are: 1 Dec – US Nonfarm payroll report, 13 Dec – FOMC announcement on interest rates, 14 Dec – MPC interest rate announcement at 12 noon, 15 Dec – Triple Witching. And note that the London Stock Exchange will close early at 12h30 on the 23rd and will be closed all day on the 26th and 27th.


Article first appeared in Money Observer

Further articles on the market in December.

 

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Monthly seasonality of FTSE 100 Index

Does the FTSE 100 Index display a monthly seasonality?

[We last looked at this in 2014, so time to see if anything has changed.]

Positive returns

The following chart shows the proportion of months that have seen positive returns for the FTSE 100 Index since 1980. For example, the index rose in April in 28 years since since 1980 (76%).

FTSE 100 Index positive returns by month [1980-2016]

Broadly, the pattern of behaviour has not changed greatly in the last two and a half years. The months which have seen the highest number of positive returns are still April, October and December.

But in recent years, since 2000, February has been getting relatively stronger, while January and March relatively weaker. Since 1980, the proportion of positive return months for January is 59%. but measured from 2000 the figure falls to 35%.

Average returns

The following chart plots the average month returns for the FTSE 100 Index for the period 1980-2016. For example, since 1980 average return in January of the index has been 0.9%

FTSE 100 Index average returns by month [1980-2016]

Similar to the previous study, the standout two strong months of the year since 1980 have been April and December. Although since 2000 the performance of December has been dropping off and has been over-taken by October as the second best performing month in recent years.

The months with the lowest (in fact, negative) returns are still May, June and September. Again, things have changed slightly in recent years, with January equal with September as having the worst average returns since 2000.

The following chart is similar to the above (in that it plots the index average returns by month, the short brown horizontal bars), but it adds a measure of the extent of variation away from the average for each month (the measure is 1 standard deviation).

FTSE 100 Index average returns by month (1SD) [1997]

An obvious observation to make is that the variability of returns around the average are very large for all months. The months that have seen the greatest variability (i.e. volatility) have been September and October, and to a slightly lesser extent January. The months with the lowest variabilility have been April and December.

Cumulative returns

The following chart shows the cumulative returns indexed to 100 for each month. For example, £100 invested in the FTSE 100 only in the month of April from 1980 would have grow to £217 by 2016.

This is not meant to represent real-life investable portfolios (e.g. transaction costs are not included), but to illustrate the large effect the returns differences can have on cumulative performance over a long term,

FTSE 100 Index cumulative returns by month [1980-2016]

Notes

  1. The superior returns for April and December can be clearly seen on this chart. Indeed, the close correlation of returns for the two months is remarkable, and rather odd. However, as can be seen, due to the recent couple of weak years for December, performance has been diverging between the the two months.
  2. The most striking change in behaviour is undoubtedly that for January. This was the strongest month for the FTSE 100 Index until the beginning of the millennium, since when its performance has fallen off quite dramatically.
  3. In a less dramatic fashion (than January) the returns for November have decreased strongly since 2005.
  4. The months represented by dashed lines are the six months May to October. These lines can be seen to largely occupy the lower part of chart – which supports the Sell in May effect.
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The Stock Market in November

November tends to be one of the quieter month for shares. After the sometimes dramatic moves in September and October, and before the traditional end-of-year rally in December, investors seem to take a pause in November. The month currently has the lowest volatility of monthly returns of any month in the year. Of course, this year may be different with the US presidential elections this month.

As can be seen in the accompanying chart, the market used to be strong in November for many years prior to 2005, but since then the market has been more likely to fall than rise in the month and has seen an average month return of -0.6%.

Monthly returns of FTSE All Share Index - November (1984-2015)

An average November

As can be seen in the following chart, on average the market tends to rise the first four days of the month, this could be influenced by investors buying into the market anticipating the strong six-month period of the year November to April (the Sell in May effect). After that the market then gives up those gains over the following few days, rises again, falls back, until finally increasing quite strongly over the final seven trading days of the month.

FTSE 100 average month chart for November [1984-2015]

Shares

In the last ten years the FTSE 350 shares that have performed best in November have been Babcock International Group [BAB], Compass Group [CPG], CRH [CRH], BT Group [BT.A], and Greene King [GNK]; Babcock, Compass and CRH have only had negative returns in November in one year since 2006. An equally-weighted portfolio of these five shares would have out-performed the FTSE 350 index by an average of 5.2 percentage points each year since 2006. While the FTSE 350 shares with the worst November performance over the last ten years have been Vedanta Resources [VED], Royal Bank of Scotland Group (The) [RBS], Tullett Prebon [TLPR], Ashmore Group [ASHM], and Standard Chartered [STAN].

Elsewhere, November has been a strong month for gold and weak for oil and GBPUSD.

Diary

This is a busy month for interim results: 64 companies from the FTSE 350 make their announcements this month.

Dates to watch for this month are: 1 Nov – two-day FOMC meeting starts, 3 Nov – MPC interest rate announcement at 12 noon, 4 Nov – US Nonfarm payroll report, 8 Nov – US Presidential Election, 24 Nov – Thanksgiving Day (US), NYSE closed, and 30 Nov – FTSE 100 quarterly review.

The big event this month will obviously be the US presidential election on 8 November. Analysis of the impact of these presidential elections on the UK market since 1972 shows that on average UK shares tends to trade stronger as the election day approaches, and then tails off in the few days following the election. The strongest day of the period has been the election day itself.

Further articles on the US presidential elections.


Article first appeared in Money Observer

Further articles on the market in November.

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Shares that like November

Shares that have been strong November

The following table lists the five FTSE 350 shares that have the best returns in November over the last ten years. For example, Babcock has an average return of 4.6% for the month of November. Each stock has risen in at least eight of the past ten years in November.

Company TIDM Avg(%)
Babcock International Group 4.6
Compass Group 4.5
CRH 4.3
BT Group 5.3
Greene King 4.8

A portfolio of these four stocks would have out-performed the FTSE 350 Index in November in nine of the last ten years with an average out-performance of 5.2 percentage points each November.

Shares that have been weak November

The following table lists the five FTSE 350 shares that have the worst returns in November over the last ten years. For example, Vedanta Reseources has an average return of -10.5% for the month of November. Each stock has fallen in at least eight of the past ten years in November.

Company TIDM Avg(%)
Vedanta Resources -10.5
Royal Bank of Scotland Group (The) -8.7
Tullett Prebon -7.8
Ashmore Group -5.3
Standard Chartered -3.7

A portfolio of these five stocks would have under-performed the FTSE 350 Index in November in eight of the last last ten years with an average under-performance of 6.7 percentage points each November.

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Last trading day of October

Next Monday will be the last trading day (LTD) of October.

Historically, the last trading day of October has been the strongest LTD of any month in the year. Since 1984 the market has on average risen 0.46% on the LTD of October, with positive returns in 69% of all years.

The following chart shows the FTSE 100 Index returns for every October LTD since 1984.

FTSE 100 last trading day of October [1984-2015]

As can be seen on the chart the market only fell twice on the October LTD in the 19 years from 1984 to 2002. One possible reason for this may have been that November is the start of the strong six month period of the year (this is part of the Sell in May effect), and investors could have been buying equities at this time in anticipation of that.

However, in recent years this pattern of behaviour has changed. Quite dramatically so – in the last seven years the market has only risen once on the October LTD. Last year (2015) the FTSE 100 Index was down 0.5% on the last trading day of October.

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The Stock Market in October

October can be a volatile month for equities. Since 1984, seven of the 10 largest one-day falls in the market have occurred in October. The largest fall happening on 20 October 1987 when the FTSE 100 Index fell 12.2%. And since 1970 the average month return for the stock market has been 0.4% ­ ranking October 9th of the 12 months. So, this would appear to bode ill for investors in October.

However, if you look at the accompanying chart you will see why averages don’t tell the whole story and how things have changed in recent years. For example, since 1992 the market has only fallen in five years (and two of those of year were the exceptional years of 2008 and 2009). And since 2000 the average stock market return for month has been 1.7%, making it the second best month for equities after April.

Monthly returns of FTSE All Share Index - October (1984-2015)

The strength of equities in October may not be unconnected with the fact that the strong six-month period of the year starts at the end of October (part of the Sell in May effect) and investors may be anticipating this by increasing their weighting in equities during October. But while October, therefore, should be regarded as a good month for shares, any occasional weakness in the month can be severe.

The average October

In an average month for October the market tends to rise in the first two weeks, then to fall back, before a surge in prices in the last few days of the month (Sell in May effect ­ aka Halloween effect ­ again!)

The month is one of only two months (the other is September) that FTSE 100 stocks tend to out-perform the mid-cap FTSE 250 stocks – since 1986 the FTSE 100 Index has on average out-performed the FTSE 250 Index by 0.7 percentage points in October.

Diary

Dates to watch out for this month are: 7 Oct – US Nonfarm payroll report (anticipated), and 13 Oct – MPC interest rate announcement at 12 noon.

And, finally, for connoisseurs of market anomalies, here’s a good one. An old Wall Street adage goes, “Sell before Rosh Hashanah; buy before Yom Kippur”. This observation was first made for the London market in 1915, and research shows it would still seem to apply in both the UK and US markets. Rosh Hashanah falls on 2 October and Yom Kippur is on 11 October.

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