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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Last trading day of January

Tomorrow will be the last trading day (LTD) of January.

Since 1984 the market has on average risen 0.14% on the LTD of January, with positive returns in 58% of all years (although since 2000 this has fallen to just 31%).

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

Last trading day of January (1984-2015)

 

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Do the first five days predict the full year?

The January Effect refers to the tendency of small cap stocks to out-perform large-cap stocks in the month of January. However, the term January Effect is used rather loosely to also refer to stocks generally being strong in the first month of the year, and also to how the direction of the market in January forecasts the market direction of the whole year (this latter effect is also termed the January Barometer). [A previous article explained the multiple January Effects in greater detail.]

Here, we are going to look at a variant of the January Barometer to see if the first five days of the year predict the return for the whole year.

First, we will call this variant of the January Barometer: January Barometer (5D).

The bald figures don’t look encouraging: in the 46 years since 1970, the January Barometer (5D) applied to the FTSE All-Share Index has been right in 26 years (57%). In other words in just over half the years since 1970 the first five days of the year have accurately forecast the full year.

But let’s look at this in more detail and see if we can tease anything out of the figures

The following is a scatter chart that plots the return on the FTSE All-Share Index for the first five days of a year against the return for the full year, for the period 1970-2015.

FTSE All-Share Index first 5-days v full year return [1970-2015]

There is a positive correlation here (given by the positive sloping trend line), however the measure of correlation (R2) is very low.

Summary: the chart shows there is a very low level of correlation between first five-day returns and returns for the full year but it is far from being significant.

However, strictly, the January Barometer only says the direction (i.e. positive or negative returns) can be forecast, not the size of returns. In which case the following chart may be more useful. This plots a binary value for each year:

  • 1: if the sign on the full year return was the same as the sign for the return for the first five-days (i.e. either both positive returns or negative returns)
  • -1: if the sign on the full year return was different to the sign for the return for the first five-days

FTSE All-Share Index first 5-days predicts full year [1970-2015]

In this chart we can see the roughly even split between years when the January Barometer (5D) works and those years when it doesn’t. However, the distribution of years when it works is interesting, as there does appear to be a certain clustering of years when the effect works and when it doesn’t.

For example, in the last 20 years the January Barometer (5D) has been accurate 14 times (a hit rate of 70%). And since 2004 there is this rather odd pattern of not working every fourth year.

US presidential elections

US presidential elections also have a four-year cycle. On the chart presidential years are marked with orange bars.

It can be seen that since 2004 the January Barometer (5D) has worked every year except in years before presidential elections.

And, over the longer term, since 1970 the January Barometer (5D) has only failed in three presidential elections (a success rate of 73%).

The outlook for 2016

Generally, the January Barometer (5D) has a low success rate. However, the effect has been more significant in recent years; plus it has a higher significance in US presidential election years (which 2016 is). In 2016 the market was down in the first five days of the year, and so the January Barometer (5D) would forecast a down year with a 73% probability.

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The Stock Market in January

January used to be the strongest month in the year for equities. But, as can be seen from the accompanying chart, all that changed after the year 2000. Since then, January has been the second weakest month of the year with an average return in the month of -1.9%. Although the month is far better for mid-cap and small-cap stocks; on average since 2000 the FTSE 250 Index has outperformed the FTSE 100 by 2.0 percentage points in January

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

Historically the euphoria of December (the 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 has been 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.

So, quite possibly a gloomy start to the year for shares.

But what is the outlook for the rest of the year?

The FTSE All-Share Index ended 2015 down 2.4% on the year. This was the second successive year the market has had negative returns. This could be bullish for the outlook for the market in 2016 as it is very rare that the market falls for three successive years (since 1960 it has only occurred twice: 1960-1962 and 2000-2002).

For further guidance we might look at the Decennial Cycle. This shows that since 1801 the average return of the FTSE All Share Index in the sixth year of the decade has been positive at 1.6%. And if one wants to consider the lunar cycle, we could look at the Chinese Calendar ­ in this 2016 will be the year of the monkey, and since 1950 the S&P 500 (for which we have the data) has returned an average 7.3% in monkey years.


Article first appeared in Money Observer

Further articles on the market in January.

 

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First trading day of January

Since 1984, the FTSE 100 Index has risen on average 0.38% on the first trading day (FTD) of January. The index has had a positive return on this day in 58% of years since 1984.

Since 2000, the performance has been much stronger on the January FTD, with an average return of 0.67% on the day, and with positive returns seen in 69% of years.

The following chart shows the returns for every January FTD since 1984.

FTSE 100 first trading day of January (1984-2015)

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Average market behaviour in February (2015)

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

Average month chart - February (2015)

As can be seen, historically the market tends to rise for the first two-and-a-half weeks and then drifts lower for the rest of the month.

January 2015

The following chart shows the average performance of the market in January (1984-2014) and overlays the actual performance in January 2015.

Average month chart - January overlay January 2015 (2014)

The market was unusually strong around the third week of the month, which led to its out-performance of the historic average for the month.

 

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Strong/weak sectors in January

Strong sectors

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

Sector TIDM
Construction & Materials
Electronic & Electrical Equipment
General Industrials
Health Care Equipment & Services
Media

Weak sectors

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

Sector TIDM
Beverages
Food & Drug Retailers
Food Producers

 

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