The Stock Market in January

January used to be one of the strongest months for shares in the whole year. 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 after year 2000 things changed dramatically.

Since 2000 the average market return in January has been -1.6% with the market seeing positive returns in only six years, and in four years since 2000 the market has fallen more than 5% in the month. This makes January the worst of all months for shares since 2000.

Monthly returns of FTSE All Share Index - January (1984-2017)

January Effect

In the stock market this month is famous for the imaginatively-titled 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 US, but it applies to the UK market as well. For example, since 1999 the FTSE Fledgling index out-performed the FTSE 100 Index in January every year until 2015. The small cap index under-performed large caps again in January 2016, suggesting that the anomaly was no more. But the historical trend re-asserted itself in 2017, with small caps out-performing large caps by 3.9 percentage points in January last year.

Outlook for 2018

Since 1800 the market has generally been relatively strong in the eighth year of the decade. It has been especially strong since 1958, with an average annual return of 11.0% and up every eight year of the decade until…yep, 2008. In that year the market fell 33% ­which has rather dented the performance of the decennial eighth years. Remove 2008 from the calculation, and the average annual return in eighth years since 1958 has been a stonking 19.3%.

The guidance from the centennial cycle is also encouraging; in 1718, 1818 and 1918 the respective annual returns for the UK market were +0.6%, +5.5%, and +11.0% ­ a steady progression of increasing returns suggesting a return of around 16% in 2018!

In the Chinese calendar it will be the year of the dog, which is excellent news. Since 1950, dog years (despite the name) have the best record of returns of the 12 zodiac signs. Since 1950, the average annual return for the S&P 500 Index has been 16.8% in dog years.

And, finally, the US presidential cycle has a significant effect on equity markets worldwide, including in the UK. 2018 will be the second year in the cycle and on average the UK market has seen returns of 2.0% in the second year of this cycle.


Article first appeared in Money Observer

Further articles on the market in January.

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International markets 2017

The following charts plot the performance of a selection of world markets in  2017.

Domestic currency

International markets 2017 Full Year Return

The following table gives a summary of performance for the fourth quarter, second half and full year in 2017.

International markets 2017 Summary 2

GBP

The following chart plots the GBP-adjusted returns (i.e. these are the returns for a GB pound investor) for the full year 2017.

International markets 2017 Full Year Return [GBP]

USD

The following chart plots the USD-adjusted returns (i.e. these are returns for a US dollar investor) for the full year 2017.

International markets 2017 Full Year Return [USD]

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Trumponomics

The Market Likes Trump

 

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Bounceback Portfolio 2018

The Bounceback Portfolio invests in the 10 worst performing FTSE 350 stocks of the previous year and holds them for the 3-month period, January-March. Since 2003, the Bounceback Portfolio has under-performed the index only twice (in 2013 and 2015).

Further information and track record on the Bounceback Portfolio can found here.

The following table lists the ten worst performing FTSE 350 stocks in 2017. These are the ten stocks that will comprise the 2018 Bounceback Portfolio.

Company TIDM 2017 Return (%)
Provident Financial PFG -68.5
Acacia Mining ACA -46.9
Dixons Carphone DC. -43.9
Centrica CNA -41.4
Petrofac Ltd PFC -41.3
Hikma Pharmaceuticals HIK -40.1
AA Ltd AA. -38.7
Saga SAGA -35.4
Inmarsat ISAT -34.7
Go-Ahead Group (The) GOG -33.6

 

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UK FTSE 350 sector indices returns 2017: Y, 2H, 4Q

The following charts plot the performance of UK sector indices in 2017 for the whole year, second half and fourth quarter.

2017 FY

Sector index returns for January – December 2017

UK sector indices - 2017 returns

The data for the chart is given in the following table.

Index Rtn(%)
Industrial Metals 71.3
Electronic & Electrical Equipment 34.0
Beverages 30.0
Mining 26.5
Software & Computer Services 26.4
Personal Goods 23.6
Industrial Engineering 21.8
Financial Services 19.1
Real Estate Investment & Services 18.5
Nonlife Insurance 17.1
Travel & Leisure 16.6
Household Goods & Home Construction 16.2
Forestry & Paper 15.9
General Industrials 15.5
Chemicals 15.0
Mobile Telecommunications 14.5
Equity Investment Instruments 14.1
Support Services 13.9
Life Insurance 13.3
Banks 11.6
Industrial Transportation 9.2
Real Estate Investment Trusts 8.7
Oil & Gas Producers 6.2
Food & Drug Retailers 5.8
Aerospace & Defense 5.3
Food Producers 3.4
Health Care Equipment & Services 3.4
Tobacco 3.2
General Retailers -1.8
Media -3.7
Automobiles & Parts -4.0
Construction & Materials -4.2
Pharmaceuticals & Biotechnology -4.7
Gas, Water & Multiutilities -14.5
Electricity -16.2
Oil Equipment, Services & Distribution -21.1
Fixed Line Telecommunications -24.9

2017 2H

Sector index returns for July – December 2017

UK sector indices - 2017 2H returns

2017 4Q

Sector index returns for October – December 2017

UK sector indices - 2017 4Q returns

 

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UK equity indices returns 2017: Y, 2H, 4Q

The following charts plot the performance of UK equity indices in 2017 for the whole year, second half and fourth quarter.

2017 FY

Index returns for January – December 2017

UK equity indices 2017

The data for the chart is given in the following table.

Index Rtn(%)
FTSE AIM 100 32.9
FTSE AIM All-Share 24.3
FTSE Fledgling 23.0
FTSE 250 14.7
FTSE SmallCap 14.6
FTSE All-Share – Total Return 13.2
FTSE 100 Index – Total Return 12.0
FTSE All-Share 9.1
FTSE 350 8.8
FTSE4Good UK 8.2
FTSE TechMARK Focus Index 7.8
FTSE 100 7.6
FTSE4Good UK 50 6.7
FTSE TechMARK All Share 5.3
FTSE UK Dividend Plus 1.6

2017 2H

Index returns for July – December 2017

UK equity indices 2017 2H

The data for the chart is given in the following table.

Index Rtn(%)
FTSE AIM 100 11.6
FTSE Fledgling 9.5
FTSE AIM All-Share 8.7
FTSE All-Share – Total Return 7.3
FTSE 250 7.2
FTSE 100 Index – Total Return 6.9
FTSE All-Share 5.6
FTSE SmallCap 5.6
FTSE 350 5.5
FTSE4Good UK 5.4
FTSE 100 5.1
FTSE4Good UK 50 4.5
FTSE TechMARK Focus Index 3.9
FTSE TechMARK All Share 1.2
FTSE UK Dividend Plus -0.3

2017 4Q

Index returns for October – December 2017

UK equity index returns 2017 4Q

The data for the chart is given in the following table.

Index TIDM Rtn(%)
FTSE AIM 100 5.8
FTSE All-Share – Total Return 5.1
FTSE 100 Index – Total Return 5.0
FTSE Fledgling 4.6
FTSE AIM All-Share 4.5
FTSE All-Share 4.3
FTSE 250 4.3
FTSE 350 4.3
FTSE 100 4.3
FTSE4Good UK 4.1
FTSE4Good UK 50 3.8
FTSE SmallCap 3.2
FTSE UK Dividend Plus 2.6
FTSE TechMARK Focus Index 2.2
FTSE TechMARK All Share 1.8

 

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London Stock Exchange holidays in 2018

The LSE will be closed on the following days in 2018-

Date Holiday Note
January 1, 2018 New Year’s Day
March 30, 2018 Good Friday
April 2, 2018 Easter Monday
May 7, 2018 Early May Bank Holiday
May 28, 2018 Spring Bank Holiday
August 27, 2018 Summer Bank Holiday
December 24, 2018 Christmas Eve
December 25, 2018 Christmas Day Closes at 12h30
December 26, 2018 Boxing day
December 31, 2018 New Year’s Eve Closes at 12h30

The above and other significant trading dates can be seen in the online Almanac Diary and can be added to your own online calendar.

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Long-term trend of the Dow Jones Industrial Average

What can the very long term tell us about the trend of the US equity market?

1900-2017

The chart below plots the month-end values of the DJIA (Dow Jones Industrial Average) from 1900 to the present day.

In January 1900 the DJIA had a value of 66 points, and in December 2017 (the time of writing) a value of 24,651.

Long-term trend of DJIA [1900-2017] 01

The above chart may be useful as a visual record of actual values of the DJIA, but it is not very helpful in discerning any underlying trend of the index.

Because the values of the DJIA vary so greatly over the period from 1900, it is more useful to plot them on a semi-log chart, where the Y-axis has a logarithmic scale. This is done in the following chart.

Long-term trend of DJIA [1900-2017] 02

This starts to look more useful.

To this chart we can now add a trendline (as has been done in the chart below).

Long-term trend of DJIA [1900-2017] 03

Regression analysis was used to fit a straight line of best fit to the values of the DJIA.

[Side note: although the trendline in the above chart is a straight line, it is useful to remember that this is an exponential line of best fit because the Y-axis is logarithmic.]

Obviously, the trendline does not perfectly match the DJIA values, but the fit is not bad. R-squared (R2) is a statistical measure of how close the data are to the fitted regression line. In this case the R2 value is 0.93. which is surprisingly high given the supposed nature of random-walk equity prices. 

We can use the equation of the fitted line to calculate trendline values of the DJIA at any time, including the future. The following table gives the calculated trend values for the current day and a few arbitrary dates in the future.

Long-term trend of DJIA - forecast from 1900

The calculated trend value of the DJIA for today (15 December 2017) is 11,941. The current actual level of the DJIA is 24,651, which means the DJIA is currently trading at a 106% premium to its trend value. Or, expressing this another way, the DJIA has to fall 52% to equal it’s long-term trend value.

As already mentioned, the table also calculates future trend values for the DJIA. For example, the DJIA trend value in December 2020 will be 13,928. And by December 2030 the DJIA trend value (23,142) will still be just below the current actual level of the DJIA index.

How much faith can we have in these calculated trendline values?

Well, the above trendline was fitted to DJIA data for the period from 1900 to today. Let’s see how the calculations change if we fit a trendline to DJIA data from 1919, just after the First World War.

1919-2017

So, the following chart is similar to the previous chart, except this time the time range is shorter at 1919-2017.

Long-term trend of DJIA [1919-2017]

By shortening the time range, the line of best fit now has an R2 of 0.94, a slight improvement on that for the previous chart (0.93). This means that we can have slightly more confidence that the DJIA actual values will be close the calculated  trend values.

Visually, we can see that the DJIA has been closer to this trendline in the last few years since the financial crisis in 2008, than the trendline calculated for the period from 1900..

As before, the following table shows the trend values calculated using the equation of the new line of best fit on the DJIA data from 1919.

Long-term trend of DJIA - forecast from 1919

This time the calculated trend value of the DJIA for today (15 December 2017) is 15,129. With the current actual level of the DJIA at 24,651, this means the DJIA is currently trading at a 63% premium to its trend value. Or, alternatively, the DJIA has to fall 39% to equal it’s long-term trend value.

So, first, it would seem that the trendline calculated on data from 1919 gives a closer approximation for today’s actual value of the DJIA than that calculated from 1900.

And, second, it seems that the trendline equations are quite sensitive to the exact time period analysed. In which case, let’s look at another example, this time DJIA data starting from 1946, just after the Second World War.

1946-2017

The following chart is as before, but this time the time range analysed is shorter: 1946-2017.

Long-term trend of DJIA [1946-2017]

The R2 (at 0.95) has again marginally increased for this line of best fit on this shorter period. Which suggests that the calculated trendline better fits the actual DJIA data.

And, visually, we can see that the  DJIA has been even closer to the trendline in the last few years since the financial crisis in 2008 than for the previous two time periods.

Broadly, the DJIA index traded very close to the trend line in the years 1946-1954, then the index traded above the trend. But from 1965 the index traded largely in a sideways pattern, and so by 1969 it crossed over the rising trendline to trade beneath it. Although the great bull market started in 1982, it wasn’t until 1995 that the index moved definitively back above the trendline. The market fell during the dot-com crash, but despite that the DJIA bounced off the trendline and did not fall below it. The index managed to stay above the trendline until the credit crunch in 2008, when the DJIA crashed down through the trendline. By 2011, the index had recovered to the trendline and then traded close to it for a number of years until the start of 2017 when the DJIA grew strongly and diverged from the trendline.

The following table shows the trend values calculated using the equation of the new line of best fit on the DJIA data from 1946.

Long-term trend of DJIA - forecast from 1946

This time the calculated trend value of the DJIA for today (15 December 2017) is 19,396. With the current actual level of the DJIA at 24,651, this means the DJIA is currently trading at a 27% premium to its trend value. Or, alternatively, the DJIA has to fall 21% to equal it’s long-term trend value.

And now, with this new trendline, the calculated trend value will be close to the current level of DJIA by December 2020.

So, the trendline of DJIA data from 1946 is not doing a bad job at estimating the current actual value of the Index.

Finally, let’s look at what happens when we calculate a trendline for the DJIA from 1971 – a somewhat arbitrary date, but chosen as the year that the Bretton Woods system ended and the US dollar became a fiat currency.

1971-2017

The following chart is as before, but this time the time range analysed is shorter: 1971-2017.

Long-term trend of DJIA [1971-2017]

As can be seen, for fairly long periods the DJIA traded close to the calculated trend values. And, for the first time in this analysis, the calculated trendline is currently above the level of the DJIA.

Again, and finally, the following table shows the trend values calculated using the equation of the new line of best fit on the DJIA data from 1971.

Long-term trend of DJIA - forecast from 1971

For this final period, the calculated trend value of the DJIA for today (15 December 2017) is 25,733. With the current actual level of the DJIA at 24,651, this means the DJIA is currently trading at a 4% discount to its trend value.

Summary

The following table summarises the  premiums that the DJIA is currently trading at over its calculated trend value, for the four different time periods.

For example, as a reminder, at the time of writing the DJIA Index is trading at a 106% premium to its trend value as calculated for data from 1900.

Long-term trend of DJIA - summary

So, which trendline do you choose? 

That, of course, is the big question.

If you think that data from the period 1900 to today is representative of the long-term trend of the DJIA Index and, importantly, that this trend is likely to continue, then this is the trendline to choose, with its indication that the DJIA is currently 106% “over-valued”. As such, you will be concerned that the DJIA is currently at risk of a large fall to move back towards its long-term trend value.

Alternatively, if you think that the time period of 1971 to today is more representative of the long-term trend of the DJIA Index, then you will be happy with the current level of the DJIA as it close to its trend value.

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Trading around Christmas and New Year

Does the equity market display any particular pattern in the days around Christmas and New Year?

Mean returns

The following chart plots the average daily returns of the FTSE 100 Index for nine days around Christmas and New Year for the periods 1984-2017 and also 2000-2017.

The nine 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.

For example, since 1984 the average return of the index on the day before Christmas has been 0.24%

FTSE 100 average daily returns around Christmas and New Year [1984-2017]

Observations

  1. Market strength increases to the fourth day (the trading day immediately after Christmas). Since 1984 the fourth day has been the strongest day of the whole period, with an average daily return of 0.49% (albeit the volatility of returns on this day is high).
  2. Generally the profile of returns for the shorter time range (2000-2017) is similar to that for the whole period from 1984. The one significant difference is that since 2000 the strongest day of the period has been the first trading day of the new year. The new year generally starts strongly on the first day, with performance trailing off the following two days.
  3. The weakest day in the period is the third day of the New Year, followed by the last trading day of the year.

Let’s now see if the pattern of positive returns confirms the above findings.

Positive returns

The following chart plots the proportion of daily returns for the FTSE 100 Index that were positive on the nine days around Christmas and New for the period 1984-2017.

For example, for 84% of the years since 1984 the returns on the day after Christmas were positive.

FTSE 100 positive daily returns around Christmas and New Year [1984-2017]

The profile of behaviour demonstrated by the positive returns is similar to that for the mean returns above.

So, how did equities perform last year around Christmas compared to the average behaviour seen above?

Last year

The following chart replicates the first chart above with the average day returns for the period 2000-2017, and also plots the actual day returns for the nine days around Christmas in 2016.

FTSE 100 Index daily returns around Christmas and New Year

As can be seen, the actual returns last year roughly followed the average pattern since 2000: the strongest days were the days after Christmas and New Year, with performance quickly trailing off after New Year.


Almanac cover - 2018 (small 2)

The above is an extract from the newly published UK Stock Market Almanac 2018.

Order your copy now!

 

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The psychology of drawdowns

How do investors measure unrealised losses?

One way is to compare the current price with the price paid for an investment. So, for example, if you pay 100 for an investment and its current market price is 90, then you are sitting on a (unrealised) loss of 10%.

But if, after buying the investment at 100, the price had risen to 120 before then falling back to 90, then there is the temptation to anchor the price at 120 and regard the current price of 90 as a 25% loss.

This 25% loss is referred to as the drawdown, which is defined as the percentage loss from a previous peak. The concept is common in trading but can also be useful for investors to understand.

The following table shows the drawdowns for the FTSE All-Share Index for the period 1969-2017.

FTSE All-Share Drawdowns [1969-2017]

The first thing to notice about the chart is that there are an awful lot of drawdowns! In fact, because the market doesn’t make new highs every day it is usually in a drawdown state. And this can have a psychological effect on investors.

If you look at a typical long-term chart of the stock market, and many individual shares, you will usually see a line that starts at the bottom left and increases (moderately steadily) to the top right.

This is a Good Thing – stocks go up in the long-term!

However, that chart does not necessarily reflect the actual experience of being invested in the market over this period. For this, the drawdown chart above may more accurately represent the feelings of investors. This is because investors’ portfolios are underwater for most of the time, i.e. the portfolio value is below its peak value (which will most likely be a recent strong memory for the investor).

The table below breaks down how long the market spends at various drawdown levels. For example, for 16% of the time from 1969 the market had a drawdown of 5%-10%, and it was in a drawdown state of over 20% for 27% of the time. And, while a drawdown of just up to 5% may not seem very much, in practice it is 32% of the time that investors are likely to be feeling slightly disgruntled having “lost” money.

FTSE All-Share Drawdowns [1969-2017] 02

So, while the data shows us that stock markets increase over the long-term, the direct personal experience of investing may be for investors largely that of a prevailing sense of loss. This sense of loss is something that investors have to learn to live with.

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