2013 market review – comparative performance of UK equity indices

The following chart shows the performance of the main UK stock market indices in 2013.

UK markets annual returns 2013As can be seen, the FTSE 100 Index had the lowest returns of the indices. The strongest performance was from small and mid cap indices.

The data for the above chart is shown in the following table.

Index 2013 Rtn(%)
FTSE Fledgling 35.8
FTSE TechMARK All Share 31.9
FTSE SmallCap 29.6
FTSE 250 28.8
FTSE AIM 100 22.6
FTSE All-Share – Total Return 20.8
FTSE AIM All-Share 20.3
FTSE 100 Index – Total Return 18.7
FTSE4Good UK 18.4
FTSE UK Dividend Plus 18.3
FTSE All-Share 16.7
FTSE 350 16.4
FTSE4Good UK 50 15.9
FTSE 100 14.4




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Sun and the stock market

When the sun shines do you find yourself hovering over the trading screen enthusiastically adding stocks to your portfolio? Or on cloudy days when the rain beats against the window do you sit morosely at your desk, your finger stabbing at the sell button?

Two academic papers seem to think this is how you behave. The first paper[1], published in 2003, analysed 26 international stock exchanges and found that sunshine was “strongly positively correlated” with market index returns. The authors attributed this to sunny weather fostering an “upbeat mood”. They even claimed it was possible (after trading costs) to trade profitably on the weather. A second paper[2], published in 2007, found that the sunshine effect was stronger for stock exchanges further away from the equator (e.g. exchanges in dark, gloomy northern European countries), and that the effect did not exist on the equator itself.

This seemed a fun and easy topic to study, so we dived in.

The chart below plots daily sun hours (at Heathrow) against the FTSE 100 Index return on the same day.

Sun hours v FTSE 100 Index

At first glance, you might think that the chart shows no correlation between the two series (i.e. sun hours and index returns). And you’d be right. Even second or third glances will not reveal any positive correlation. In fact, if you look very closely and squint, you may even see a negative correlation – which is not at all what we want.

We should have stopped there. But we were motivated to find some correlation. We’d read the academic papers and also paid a reasonable amount of cash for the weather data (stock tip: if the Met Office is ever privatised…).

So, on we went.

Perhaps the effect does not exist for the FTSE100 Index which, after all, is heavily influenced by foreign investors, who are trading from their pools in the Caribbean or skyscrapers in Shanghai and who are unlikely to be affected greatly by how sunny it is in Orpington. So, we looked at sun hours and the FTSE 250 Index – an index more closely reflecting UK PLC and possibly attracting more domestic investors.

No, no correlation.

Perhaps the effect really displays itself for smaller stocks? We drafted in the FTSE Small Cap Index.

No correlation.

The AIM market – home of optimistic punters with a sunny disposition. Surely, the sunshine effect will reveal itself there?


OK. Let’s start manipulating the data.

We calculated the average daily sun hours for the winter and summer periods, and then adjusted the daily sun hours data by calculating the daily divergence of sun hours from their seasonal average. After all, just two hours of sunshine in the winter could be considered a sunny day. That should do it.


We limited the analysis to just those days with extremes of sunshine (i.e. daily sun hours one standard deviation away from the average).


Perhaps the change in sun hours from one day to the next would work? In other words, the effect would kick in when a sunny day followed a cloudy day, or vice versa.


In desperation to rescue something from all the research, we looked at sun hours against daily trading volumes. If the curmudgeonly UK investor wasn’t inspired by the sun to increase his net equity exposure, perhaps he at least punted around a bit more. Well, finally, on this one…….

No. No correlation.

At the end of everything the best we could do was the chart below – the FTSE 250 Index plotted against the change in sun hours from the previous day.

Hardly much of an improvement on the first chart – still just a random mass of uncorrelated dots. At least the correlation is (minutely) positive, but we wouldn’t recommend trading off it.


So, who is wrong, the papers or our research?

It’s difficult to say. Our data covered the period 2007-12, while the first academic paper looked at data for the period 1982-97. Possibly the effect has changed in the intervening years.

But if the academic papers are right, and the sunshine effect does exist, this would seem to conflict with the strongest seasonality effect in the market – whereby the market in the (dark) winter months out-performs the (sunny) summer months.

Tricky thing, the market.

[1] Hirshleifer,  D. and T. Shumway (2003). Good day sunshine:  Stock returns and the weather. The Journal of Finance 58 (3)

[2] Keel, S. P. and M. L. Roush (2007). A meta-analysis of the international evidence of cloud cover on stock returns. Review of Accounting and Finance 6 (3)

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Performance of UK markets in 1H 2013 – a good six months for small and mid-caps

The following chart shows the performance of the main UK stock market indices in the first six months of 2013.

Data for the above chart-

Name TIDM Change 1H 2013(%)
FTSE Fledgling 13.9
FTSE TechMARK All Share 13.3
FTSE Small Cap 11.6
FTSE 250 11.5
FTSE All Share – Total Return 8.5
FTSE UK Dividend Plus 8.4
FTSE4Good UK 7.3
FTSE All-Share 6.3
FTSE 350 6.2
FTSE 100 5.4
FTSE AIM 100 -0.1
FTSE AIM All-Share -2.2



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The January Effect(s)

It’s January, so let’s talk about the January Effect.

But which January Effect would that be?

We’ve come across three different uses of the term. A quick overview follows.

1. Small-caps out-perform large caps in January

The most common use of the term January Effect describes the tendency of small-cap stocks to out-perform large-cap stocks in January.

In 1976 an academic paper found that equally weighted indices of all the stocks on the NYSE had significantly higher returns in January than in the other 11 months during 1904-1974. This indicated that small capitalisation stocks out-performed larger stocks in January. Over the following years many further papers were written confirming this finding. In 2006 a paper tested this effect on data from 1802 and found the effect was consistent up to the present time.

The UK market experiences the same January Effect as seen in the US market. The small cap out-performance in January is significantly strong: the FTSE Small Cap Index has out-performed the FTSE 100 Index by an average 3.7 percentage points in all Januaries since year 2000. And the small cap index has under-performed the FTSE 100 Index in just one year in the past 13.

The following chart shows the average FTSE Small Cap Index out-performace of the FTSE 100 Index for each month since 2000.

2. January predicts the market for rest of the year

Historically, the returns in January have signaled the returns for the rest of the year. If January market returns are positive, then returns for the whole year have tended to be positive (and vice versa).

This is sometimes called the other January effect, or January Predictor or January Barometer and was first mentioned by Yale Hirsch of the Stock Traders Almanac in 1972. A variant of this effect has it that returns for the whole year can be predicted by the direction of the market in just the first five days of the year.

Academic research has largely found that January returns can predict the rest of the year, but there is some doubt as to whether the effect can be exploited.

And Dan Greenhaus of BTIG points out that January is not necessarily any better a predictor of full year performance than any other month. According to him,

When February is down, the 12 month return inclusive of that February is 2.0%. When February is up, the S&P 500 returns 12.53%

and similar for the other months.

3. The market tends to rise in January

In 1942 Sidney B. Wachtel wrote a paper, “Certain Observations on Seasonal Movements in Stock Prices”, in which he proposed that stocks rose in January as investors began buying again after the year-end tax-induced sell-off.

Looking at the returns for the FTSE 100 Index since 1984, it is true that they tend to be positive – but not strongly so. The index has risen in 57% of all Januaries since 1984 with an average increase of 0.3% – which ranks it in eighth place of the 12 months.


Other papers:


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The Stock Market in January

January is a middling month for the stock market. Since 1984 the market has risen in 57% of all years in January, with an average rise of 0.3%. This makes the month eighth in the ranking of monthly performance. Interestingly, it is the month whose performance has changed the most over the last few years – in 2007 the month ranked fourth and has since fallen four places.

The accompanying chart plots the average day-by-day performance of the FTSE 100 Index throughout January since 1985.

As can be seen, 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. In fact, 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, and rises to end the month slightly up.
January is part of the strong six months of the year (November-April, the Sell in May effect), but it is the weakest month in this period.

The month is better for mid-cap and small-cap stocks. On average, the FTSE 250 Index outperforms the FTSE 100 by 1.6 percentage points in January – the best out-performance (with February) of all months. Small caps do even better, out-performing the FTSE 100 Index by on average 3.7 percentage points in the first month.

A famous market predictor in the US has it that the direction of the market in the whole year will be the same as that for the first five days of January. Research shows that the same rule works more or less for the UK market as well.

Anniversaries for the month are: 18 January will be the 40th anniversary for both Bodycote and Halma who listed on the LSE in 1972, while 29 January will see respectively the 50th and 60th anniversaries of British American Tobacco and Monks Investment Trust listing on the LSE.

Dates for the month: 1 January – the LSE closed, 3 January – MPC interest rate announcement at 12 noon, 20 January – inauguration of new (old) US president, 21 January – US market closed (Martin Luther King Day).

Article first appeared in Money Observer.

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