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 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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So, was there a Santa Rally in 2015?

A previous article looked at whether the Santa Rally exists in the UK stock market.

To recap, below is a chart from that article.

Santa Rally [2015] 05

This chart plots the cumulative average daily returns for the FTSE 100 Index for the month of December for the period 1984-2014.

The conclusion of the article was that a Santa Rally can be observed most years, and that the rally usually starts on the 10th trading day of December.

So, what happened in 2015?

The following chart plots the performance of the FTSE 100 Index in December 2015. (NB. The X-axis shows the trading - not calendar - days of December.)

FTSE 100 December 2014 and 2015

As can be seen, the Index fell fairly steadily for the first ten days of the month; a decline of 7.6% was seen over these ten days. On the 11th day the market rallied, and climbed 7.5% over the following nine days; before weakening slightly on the final two trading days of the year.

The 6.3% rally from the tenth trading day to the final day of the year can be considered the Santa Rally for 2015.

For comparison, the Santa Rally for 2014 is also shown. In this case, the Santa Rally started a day later (on the 11th trading day) of December. In 2014 the Santa Rally returned 6.3%.

So, December can be split into two periods: the “Where’s Santa?” period of the first ten trading days, when people ask if Santa is coming to the market that year, and then the period after the tenth trading day when a Santa Rally is often seen.


Other articles on the Santa Rally.

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Market returns around Christmas and New Year (update)

This updates the previous analysis of the historical behaviour of the FTSE 100 Index since 1984 for the nine days around Christmas and New Year. The 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.

The following chart shows the average returns for these nine days around Christmas and New Year.

FTSE 100 average daily returns around Christmas and New Year [1984-2015]

Notes:

  1. The average daily change of the FTSE100 index from 1984 for all days is 0.03%, so it can be seen that all nine days around Christmas and New Year are stronger than the average daily returns for the rest of the year.
  2. Generally, the market strength increases to the fourth day (the trading day immediately after Christmas) – this is the strongest day of the whole period, when the markets increases 83% of years since 1984 with an average return on this day of 0.47%. Although it should be noted that the standard deviation is the second highest on this day, meaning that the volatility of returns is greatest (the index actually fell 3% on this day in 1987 and 2002).
  3. The weakest day in the period is the third day of the New Year.
  4. The new year generally starts strongly on the first day, with performance trailing off the following two days.

The following chart shows the proportion of returns that are positive for each of the nine days.

FTSE 100 positive daily returns around Christmas and New Year [1984-2015]

The profile is similar to that for the average returns: the market is increasingly strong to the first day after Christmas, and then drops off after that.

To check the persistency of these results, the following chart compares the average daily returns for each day for the period 1984-2015 (i.e. as above) with the shorter period 2000-2015.

FTSE 100 average daily returns around Christmas and New Year

Broadly, the behaviour in the last 15 years has been similar to that for the longer period since 1984. The one obvious difference has been the extraordinarily strong average returns on the first trading day of the year seen since 2000.


 

Extract taken from the newly published UK Stock Market Almanac 2016.

Order your copy now!

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The Stock Market in December

Towards the end of the year there seems to be an inverse relationship between the weather and the stock market. In December, as temperatures get colder, shares get hotter! Since 1970 the FTSE All Share Index has risen in 76% of all years with an average monthly return of 2.2%.

Incredibly, the index has only fallen four times in December since 1986, and in only one of those years was the decline significantly large. As it happens, the market did fall last December, in 2014, but this is worth mentioning as it is such a rare event. So, this all makes December the strongest month in the year for shares.

Monthly returns of FTSE All Share Index - December (1984-2014)

Given the general strength of the market in December, an odd feature of the month is that it has the weakest first trading day for any month in the year –average first day returns have been -0.07% with a probability of a positive return a lowly 45%.

The average December

After this first trading day, on average the market tends to increase gently in the first two weeks of the month, but then rises strongly in the final two weeks. Indeed, this is the strongest two-week period in the whole year, with the three strongest days of the year all occurring in this two-week period.

Santa Rally

This final spurt in share prices at the end of the year is sometimes called the Christmas, or Santa, Rally. Although there is no common agreement on exactly when the rally starts – some say it covers the whole of December, others (and the data tends to back this up) say it just covers the final two weeks of the year. In recent years there has been some sign that shares have started rising as early as November in anticipation of the Christmas Rally.

Diary

December is a very quiet month for company results: only three FTSE 100 companies release their prelims (finals) in this month and three their interims, so a quiet time for company analysts.

Dates to watch this month are: 2 Dec – US Nonfarm payroll report, 15 Dec – MPC interest rate announcement at 12 noon, 16 Dec – Triple Witching. And note that the London Stock Exchange will close early at 12h30 on the 24th and 31st and will be closed all day on the 25th.


Article first appeared in Money Observer

Further articles on the market in December.

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Does the Santa Rally exist?

The Santa Rally holds that the market is strong at the end of the year (around Christmas). Is this true?

The market is strong in December

The following chart shows the average returns of the FTSE 100 Index for each of the 12 months for the period 1980-2014.

Santa Rally [2015] 01

Over this period the average return of the FTSE 100 Index in December has been 2.0% (the second strongest average month return after April).

OK, so the average return in December is high, but is this attributable to just a few strong years?

To answer this, the following chart plots the proportion of December month returns that were positive over the same period (1980-2015).

Santa Rally [2015] 02

By this measure, December  is the strongest month in the year for the FTSE 100. In the 35 years since 1980, the Index has risen in 28 years (80%).

The market strength in December can be seen in more detail in the following chart, which plots the actual return of of the FTSE 100 for each December since 1980.

Santa Rally [2015] 03

The Index has only fallen significantly in December in four years since 1980. Until last year (2014), the Index had been on an 11-year winning streak.

When does the Santa Rally start?

So, December is strong for the FTSE 100. But is it possible to determine more precisely when the Santa Rally starts?

The following chart plots the cumulative average daily return of the Index throughout the year (more information about this chart).

Santa Rally [2015] 04

On average the UK market is strong from the start of November (this is a feature of the Sell in May effect). But we can also see an acceleration of the market at the very end of the year. To analyse this further the following chart plots the cumulative average daily return of the Index for December (i.e. the same chart as the above, but zoomed in on December).

Santa Rally [2015] 05

From this we can see that, on average, the market is flat for the first 10 trading days of December, after which it rises strongly. So, we can say that the Santa Rally starts on the 10th trading day of December.

How has this played out in recent years?

The following chart plots the FTSE 100 Index for the last two months of each year for the ten years since 2005. (The index values have been re-based to all start at 100.) The shaded area to the right indicates the final two weeks of the year.

Santa Rally [2015] 06

Yes, it’s something of a mess. So perhaps we can’t draw any strong conclusions. However, one can observe a slight tendency in most years for the market to rise in the final fortnight.

What is the cause of the Santa Rally?

Short answer: we don’t know?

There is no definitive explanation for this effect. Although various reasons have been proposed, including: fund managers window dressing their portfolios, positive sentiment in the market caused by the festive season which is accentuated by low trading volumes, anticipation of the January Effect, and tax reasons (NB. “tax reasons” are often cited in the absence of any definitive explanation).

Conclusion

  1. The UK stock market does tend to be strong in December (although it wasn’t in 2014).
  2. Stocks accelerate upwards from the tenth trading of December (which in 2015 will be 14th December). It is this last hurrah of the market – in the final fortnight – that can be called the Santa Rally.
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The Santa Rally

The average return of the FTSE 100 Index on the first trading day of December since 1984 is -0.04%. We can also calculate the average return of the FTSE 100 Index on the second trading day of December – this happens to be 0.03%. We can continue this process until we have calculated the average return for the Index on each trading day of December since 1984.

With these average daily returns, we can calculate a theoretical average FTSE 100 Index for the month of December. If this theoretical index starts at 100 then the index will have a value of 99.96 on the first day (after a fall of 0.04%), and 99.99 on the second day.

The following chart plots the values of this theoretical average FTSE 100 index calculated from the average daily returns for December.

Average month chart - December (2014)Starting at 100 the theoretical index ends the month at 102.5 – reflecting the fact that the average return for the FTSE 100 Index for the whole month of December is 2.5%.

One of the most remarkable features of this chart (and in fact for the whole year) is the strong performance of the market from the middle of the month. This surge in equities has been termed the Santa Rally (or the Christmas Rally).

From the above chart it can be seen that on average the Santa Rally starts on the 10th trading day of the month.

Santa Rally [2014] In the year 2014, the 10th trading day is the 12th December.

 

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Average market behaviour in December (2014)

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

Average month chart - December (2014)As can be seen, historically the market has traded fairly flat for the first two weeks of December and then risen very strongly in the second half of the month.

November 2014

The following chart shows the average performance of the market in November (1984-2013) and overlays the actual performance in November 2014.

Average month chart - November overlay November 2014 (2014)

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Strong/weak sectors in December

Strong sectors

The table below lists the sectors that have historically out-performed the market in December.

Sector TIDM
Construction & Materials
Life Insurance
Support Services
Travel & Leisure

Weak sectors

The following table lists the sectors that have been weak in December.

Sector TIDM
Banks
General Retailers
Pharmaceuticals & Biotechnology
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The Stock Market in December

Towards the end of the year shares tend to rise strongly – a characteristic sometimes called the end of the year rally, or the Christmas rally. Whatever, it makes December the best month of the year for investors. Since 1970 the FTSE All Share Index has risen in 77% of all years with an average monthly return of 2.2%. Incredibly, the index has only fallen three times in December since 1986, and in only one of those years was the decline significantly large.

The accompanying chart plots the percentage performance of the FTSE All Share Index for each December since 1982. For example, last year in 2013 the market rose 1.7% in December.

Monthly returns of FTSE All Share Index - December (1982-2013)An odd feature of December is that it has the weakest first trading day for any month in the year –average first day returns have been -0.04% with a probability of a positive return a lowly 47%. This is strange as the month as whole has the strongest returns.

Average month

After this first trading day, on average the market tends to increase gently in the first two weeks of the month, but then rises strongly in the final two weeks. Indeed, this is the strongest two-week period in the whole year, with the three strongest days of the year all occurring in this two-week period. The strong lesson from history is do not be out of the market during this last two weeks of the year.

Sectors

In the last twenty years the sectors that have been strong in December have been: Construction & Materials, Life Insurance, Support Services and Travel & Leisure; while the weak sectors have been: Banks, General Retailers, and Pharmaceuticals & Biotechnology.

Shares

For companies, the following FTSE 350 shares have performed well in December over the last ten years: Balfour Beatty, G4S, William Hill, and Witan Investment Trust; the shares of these companies have risen every December for the past ten years. The shares that don’t seem to like December are: Randgold Resources and Rank Group.

Diary

December is a very quiet month for company results: only three FTSE 100 companies release their prelims (finals) in this month and there are no interims expected.

Dates to watch this month are: 2 Dec – FTSE 100 Index quarterly review, 4 Dec – US Nonfarm payroll report (anticipated), 10 Dec – MPC interest rate announcement at 12 noon (anticipated), 18 Dec – Triple Witching. And note that the London Stock Exchange will be closed the 25th and 26th and will close early at 12h30 on the 31st.


Article first appeared in Money Observer

Further articles on the market in December.

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