The Stock Market in August

The UK equity market has displayed a rather odd behavior in August since 2011: alternating mildly positive returns for the month in even years, with large negative returns in odd years. However, that pattern broke down last year, in 2017, when the market had a small positive return (0.7%) in an odd year.

Besides that odd pattern, as can be seen in the chart, apart from the anomalous years of 2008 and 2009, since 2000 even when the market does rise in August, the returns are small.

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

The average August

From 1970 the average return for August of the FTSE All-Share index has been 0.7%, with 63% of years seeing a positive return in the month. But since 2000 the performance has declined and the average return has fallen to zero. As a result, August now ranks ninth of all months of the year.

Sectors

The strongest sectors in August in the last ten years have been: Oil Equipment Services and Distribution, Gas, Water and Multiutilities, and Software and Computer Services. While the weakest sectors in the month have been: Fixed Line Telecommunications, Mining, and Oil & Gas Producers.

Companies

Over the last ten years the FTSE 350 stocks that have tended to perform well in August have been: Fisher (James) & Sons [FSJ], Petrofac [PFC], and Synthomer [SYNT]. Those first two stocks have seen positive returns in August in nine of the past ten years. By contrast, the FTSE 350 stocks that have tended to perform poorly in the month are: Standard Chartered [STAN], Rio Tinto [RIO], and Vedanta Resources [VED]. Rio Tinto has fallen in every August since 2007.

Diary

Significant dates this month are: the MPC interest rate announcement on the 2nd, US Nonfarm payroll report on the 3rd, the MSCI quarterly index review announcement on the 13th, and the LSE is closed on the 27th (Summer bank holiday).


Article first appeared in Money Observer

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The Stock Market in July

Since 1970 the FTSE All-Share Index has seen an average return of 0.8% in July, with 54% of years seeing positive returns in this month. This makes July the fifth strongest month of the year for shares. As can be seen in the accompanying chart, in the last nine years the market has only fallen twice in July; so currently July is on a roll.

Monthly returns of FTSE All Share Index - July (1984-2017) 2

The average July

In an average July the start of the month tends to be strong ­ the first week of the month is among the top ten strongest weeks in the year. After that, the market has a tendency to drift lower for a couple of weeks until finishing strongly in the final week of the month.

July is one of only three months (the others being September and October) where the FTSE 100 tends to out-perform the mid-cap FTSE 250, although the out-performance in July is not significantly large (an average of 0.1 percentage points since 1986). Better is the performance of the FTSE 100 relative to the S&P 500, in sterling terms July is the second-best month for the FTSE 100 (the UK index has out-performed the US index by an average of 1.0 percentage points since 1984).

Sectors

Historically the sectors that have been strong in July are Banks, Real Estate Investment Trusts, and Software & Computer Services, while weak sectors have been Electricity, Industrial Transportation, and Health Care Equipment & Services.

Companies

On the shares front, companies that have seen strong share performance in July have been: Travis Perkins [TPK], Renishaw [RSW], Morgan Advanced Materials [MGAM], Bodycote [BOY], and Elementis [ELM]. The latter’s shares have only fallen once in July in the past ten years. Companies that have historically performed weakly in July are: TalkTalk Telecom Group [TALK], SSE [SSE], CRH [CRH], Redefine International [RDI], Babcock International Group [BAB]. Shares of SSE have fallen every year in July except one in the past ten years ­ the worst record of any FTSE 350 stock.

Diary

July is a busy month for companies announcing their interim results: 28 FTSE 100 companies will be doing so and 47 FTSE 250 companies.

On the economics front: there is the US Nonfarm payroll report on the 6th, and the two-day FOMC meeting starts on the 31st. The New York Stock Exchange will be closed on 4th July.


Article first appeared in Money Observer

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The Stock Market in June

A quick glance at the accompanying chart shows that June is not usually a good month for equities. The chart shows the month returns for June of the FTSE All-Share Index from 1984; one can easily see the market falls more often than it rises in June. And when the market does decline, the falls can be quite large, whereas the positive returns are usually only modest.

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

In the 48 years since 1970 the market has seen positive returns in June 21 times, with an average month return of -1.0%. In recent years the record is even worse. In the 18 years since 2000 the market has seen positive returns in June just seven times (36%), with an average month return of -1.7%. Last year continued the trend, with a -2.8% fall in the market in June.

Not surprisingly June has the second worst record for equity returns of all month. And the May-June period has been the weakest two-month period in the year for the market.

The average June

In an average June the market starts strong, hitting its month high on the second or third trading day, but prices then drift down steadily for the rest of the month, although the market ends the month on a positive note – the last trading day is the second strongest in the year.

Companies

Over the last ten years FTSE 350 stocks that have tended to be strong in June are: BTG [BTG], RPC Group [RPC], Halma [HLMA], Telecom plus [TEP], and Ted Baker [TED]. While stocks that have a poor track record in the month are: Barclays [BARC], Thomas Cook Group [TCG], Grafton Group [GFTU], Travis Perkins [TPK], and Marston’s [MARS]. Just two stocks in the FTSE350 have fallen in every June for the past ten years: Barclays [BARC] and Bodycote [BOY]; over this period the average June return for Barclays shares has been -10.5%, the lowest average return for any FTSE350 stock..

Diary

Not much action on the results front this month, June is the quietest month for results from FTSE 100 companies – just two companies making announcements this month.

This is quite a busy month on the economics front: there is the US Nonfarm payroll report on the 1st, the FOMC interest rate announcement on the 13th, ECB Governing Council Meeting on the 14th, and the MPC interest rate announcement on the 21st. There’s Triple Witching on the 15th. And on the 15th the announcement will be made of any changes in the FTSE 100 and other FTSE indices.


Article first appeared in Money Observer

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The Stock Market in May

It’s that time of the year again when stock market lore advises investors to get out of the market and, effectively, go on holiday for six months. And, indeed, Sell in May has been good advice over certain periods, for example since 1970 the average return in May for the FTSE All-Share Index has been -0.4% (making it one of only three months that has a negative return ­ the other two being June and September).

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

However, in recent years equities have performed somewhat better in May. Since 2000, the market has seen more Mays with positive month returns than negative and, as can be seen in the accompanying chart, in the last five years the market has been up every May (last year, in 2017, the FTSE All-Share Index had a not insignificant month return of 3.9%).

So, why does May have a bad reputation for shares, and why is the saying “sell in May” so popular?

One reason can be seen in the chart. Although the proportion of positive and negative month returns in May are roughly equal, it can be seen that the positive returns in May are relatively low, whereas when the market falls in May it can suffer quite a large sell-off. In May 2012 the FTSE All-Share Index fell 7.5%, which the largest fall in the index in any month in the last six years.

The average May

In an average May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half.

Stocks

At the stock level, in the last ten years the FTSE 350 shares with the best average performance in May have been: Aveva Group [AVV], 3i Group [III], Babcock International Group [BAB], Cranswick [CWK], and Severn Trent [SVT]. All these stocks have only seen a negative return in May in one year since 2007. While the FTSE 350 shares with the worst record in May have been Petra Diamonds [PDL], Ferrexpo [FXPO], Thomas Cook Group [TCG], Acacia Mining [ACA], and Carillion [CLLN],

Diary

Coming up in May we have the two-day FOMC meeting starting on the 1st, US Nonfarm payroll report on the 4th, May Day bank holiday on the 7th (LSE closed), MPC interest rate announcement on the 10th, Spring bank holiday on the 28th (LSE and NYSE closed), and the quarterly 30th.


Article first appeared in Money Observer

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The Stock Market in April

Since 1970, the FTSE All-Share Index has fallen in April in only nine years. This is quite remarkable, and not surprisingly makes April the strongest month of the year for equities. The average return for the index in the month since 1970 is 2.6%, again this is the best performance of any month of the year by quite a margin. Although in recent years, the market’s performance in April has not been so stellar. Since 2000, the average return of the FTSE All-Share Index in April has been 1.8%, with positive month returns seen in 12 of the last 18 years. And it might be noted that the market actually fell in April of last year.

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

The market often gets off to a strong start in the month – the first trading day of April is the second strongest first trading day of all months in the year. The market then tends to be fairly flat for the middle two weeks and then rising strongly in the final week.

End of the strong half of the year

Investors need to make the most of April. After this month the market enters a six-month period when equities have tended to tread water (the Sell in May effect).

Sectors

The FTSE 350 sectors that tend to be strong in April are: Industrial Engineering, General Retailers, and Oil & Gas Producers; while the weaker sectors are: Construction & Materials, Household Goods, and Media.

Stocks

At the stock level, the five FTSE 350 shares with the best April volatility-adjusted returns over the past ten years are: JD Sports Fashion [JD.], Ashmore Group [ASHM], Renishaw [RSW], UDG Healthcare [UDG], and Weir Group [WEIR]. Just two FTSE 350 stocks have seen their shares rise in every April since 2007: JD Sports Fashion and Temple Bar Investment Trust. The FTSE 350 stocks with the weakest record in April have been: Balfour Beatty [BBY], BAE Systems [BA.], RELX [REL], Booker Group [BOK], and Pearson [PSON]. Since 2007 the shares of Balfour Beatty and RELX have seen positive returns in April in only three years.

FTSE 100 v S&P 500

This is the strongest month for the FTSE 100 relative to the S&P 500 (in sterling terms), the former out-performs the latter by an average of 1.3 percentage points in April ­ the UK index has out-performed the US index (in sterling terms) in April in 14 of the past 16 years.

Easter holiday

It’s Easter on 1st April so the LSE will be closed on the 2nd (Easter Monday). A famous anomaly in stock markets is that prices tend to be strong on the day preceding and the day following a holiday. This effect is strongest in the year around the Easter holiday.


Article first appeared in Money Observer

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The Stock Market in March

Since 1990 the market has had an average return of 0.2% in March, with returns positive in 54% of all years. This ranks March seventh among months of the year for market performance. Although as can be seen in the accompanying chart, negative returns have been seen in March with increasing frequency in recent years.

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

The general trend for the market in March is to rise for the first three weeks and then fall back in the final week – the last week of March has historically been one of the weakest weeks for the market in the whole year.

Small cap v large cap

Small cap stocks tend to outperform large cap stocks at the beginning of the year, and March marks the final month of the three-month period when the FTSE 250 strongly out-performs the FTSE 100. Since 1986 in March on average the FTSE 250 has out-performed the FTSE 100 by 0.8 percentage points.

Sectors

The sectors that tend to be strong in March are: Chemicals, Industrial Engineering, Industrial Transportation, Oil Equipment, Services & Distribution, and Support Services. The Chemicals and Oil Equipment, Services & Distribution sectors have seen positive returns every March for the past 11 years. While the weak sectors in March have been: Banks, Fixed Line Telecommunications, Gas, Water & Multiutilities, Nonlife Insurance, and Pharmaceuticals & Biotechnology. The Banks sector has the worst record: it has seen positive returns in only three of the past 11 years.

Shares

For stocks, the FTSE 350 shares that have performed the best over the last ten years in March are: IWG [IWG], Clarkson [CKN], Senior [SNR], Intertek Group [ITRK], and Petrofac Ltd [PFC]. Clarkson, Intertek, and Petrofac shares have only been down in March once in the past 11 years. The weakest FTSE 350 shares in March have been Vectura Group [VEC], Lancashire Holdings Ltd [LRE], Kier Group [KIE], Renishaw [RSW], and HSBC Holdings [HSBA].

Dividends

March is the busiest month of the year for FTSE 100 companies paying dividends. And it’s also a busy month for company announcements: the busiest for FTSE 250 companies in the year with 71 companies announcing their prelims this month (along with 24 FTSE 100 companies).

Aside from stocks, March has often been a weak month for gold and a strong month for oil.

Holidays

It’s Good Friday at the end of the month. A famous anomaly in stock markets is that prices tend to be strong on the day preceding and the day following a holiday. This effect is strongest in the year around the Easter holiday.


Article first appeared in Money Observer

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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

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The Stock Market in December

Since 1970 December and April have been the best two months of the year for shares. Since that year the FTSE All-Share Index has risen in December in 74% of all years and the average month return has been 2.1%. In addition, the volatility of December returns is significantly less than any other month.

As can be seen in the accompanying chart the market has only fallen in December in six years since 1984. But two of those negative-return Decembers were very recent: in 2014 and 2015. Which might have led one to wonder if the stellar record of December for shares was ending. However, last year, in 2016, the strength of the market in December reasserted itself when the FTSE All-Share Index rose 4.9% in the month.

Monthly returns of FTSE All Share Index - December (1984-2016)

However, the solid performance of the market in December is only part of a wider trend, namely that from the end of October shares tend to be strong through to the end of the year. This is 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.

The average December

In an average December, shares have in fact tended to be weak in the first couple of weeks of the month, 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), and the three days with the highest average daily returns in the year all occur in this two-week period.

Dividends

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.

Sectors

The FTSE 350 sectors that have tended to be strong in December are: Electronic & Electrical Equipment, Construction & Materials, and Media; while the weak sectors are: Banks, General Retailers, and Fixed Line Telecommunications.

Diary

Dates to watch this month are: 5 Dec ­ FTSE index quarterly reviews announced, 7 Dec – US Nonfarm payroll report, 19 Dec – FOMC announcement on interest rates, 20 Dec – MPC interest rate announcement, 21 Dec – Triple Witching. And note that the London Stock Exchange will close early at 12h30 on the 22nd and will be closed all day on the 25th and 26th.


Article first appeared in Money Observer

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The Stock Market in November

Since 1990 the FTSE All-Share Index has seen an average return of 0.7% in the month of November; with positive returns in 15 of the last 27 years. This ranks November in the middle of the 12 months for equity performance. However, in recent years the market has been noticeably weak in November ­in the last 11 years the Index has only seen positive returns in the month in three years.

Monthly returns of FTSE All Share Index - November (1984-2016)

Sell in May…

The significant feature of November is that it marks the start of the strong six-month period of the year (November to April ­ an aspect of the Sell in May effect). In other words, investors should be increasing exposure to the market this month (if they haven’t already done so in October).

Sectors

In the last ten years the FTSE 350 sectors that have performed strongly in November have been: Beverages, Electronic & Electrical Equipment, Fixed Line Telecommunications, Food Producers, Life Insurance, and  Travel & Leisure. While the weak sectors have been: Aerospace & Defense, Banks, Oil & Gas Producers, and Real Estate Investment Trusts.

FOMC announcements

Since 1981 the US Federal Open Market Committee (FOMC) has had eight scheduled meetings per year, the timing of which is quite irregular. Each meeting is two days long, with a policy statement released at the end of the second day (1 November this month). Many academic papers have studied the effect of these FOMC announcements on financial markets. One such paper found large average excess returns on U.S. equities in the 24-hour period immediately before the announcements (an effect the paper called the “Pre-FOMC Announcement Drift”). According to this paper, “about 80% of annual realized excess stock returns since 1994 are accounted for by the pre-FOMC announcement drift”.

A quite amazing finding!

It might be added that a similar effect can be seen for the UK equity market as well. The average daily return for the UK market in the 24 hours before the FOMC statement is 0.33%, over ten times greater than the average daily return on all other days.

Diary

Besides the FOMC statement other dates to watch for this month are: 2 Nov – MPC interest rate announcement at 12 noon, 3 Nov – US Nonfarm payroll report, and 23 Nov – Thanksgiving Day (US), NYSE closed.


Article first appeared in Money Observer

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The Stock Market in October

October has a bad reputation among investors. Partly justified, one might think: in 1987 the FTSE All-Share Index fell 27% in the one month of October, and then in 2008 the index fell 12% in the month. However, a glance at the accompanying chart tells a different story. In the 27 years since 1970, the UK stock market has only seen negative returns in October in six years – a record second only to December. And in recent years equities have remained strong in October, only falling in one year since 2010.

Monthly returns of FTSE All Share Index - October (1984-2016)

But, while average equity market returns in October may be better than thought, the month does have a deserved reputation for volatility. Only September can challenge it for share price fluctuations.

Sell in May/Halloween effects

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. The last day of the month also tends to be strong, in fact it has the best record of any month’s last trading day – which, again, may be related to the Sell in May effect.

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!)

Shares

In the last ten years, shares that have the strongest record in October are: Diageo [DGE], Tate & Lyle [TATE], and Whitbread[WTB]. Especially strong has been Diageo, which has seen positive returns in October in every year since 2006, with an average return in the month of 3.1%. By contrast, weak shares in October over the last ten years have been: Marshalls [MSLH], William Hill [WMH], and UDG Healthcare [UDG].

Large v mid caps

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: 6 Oct – US Nonfarm payroll report, and 31 Oct the two-day FOMC meeting starts.


Article first appeared in Money Observer

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