The Stock Market in May

Sell in May?

One of the most famous adages in the stock market is “sell in May”. And often this can be good advice. However, look at the accompanying chart ­ you can see that the UK equity market has actually had positive returns in May for the past four years! Admittedly, last year the FTSE All-Share Index saw a rise of only 0.2%, but that’s still a positive return.

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

In fact, since 1984 the market in May has seen roughly an equal proportion of positive and negative month returns (the proportion of years with positive returns in May is 51%).

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 small, whereas when the market falls in May it can suffer quite a large sell-off. Since 1970 the average market return in May has been -0.5%, which is the third worst record of all months.

The other reason why investors should take note of “sell in May” is that, longer-term, May marks the start of the under-performing half of the year (May through to October); a period over which share performance can tend to be lacklustre.

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.

FTSE 100 v S&P 500

There are some months that the UK market fairly consistently outperforms the US market. May isn’t one of them. In fact, May is the weakest month of the year for the FTSE 100 Index relative to the S&P 500 Index; on average the UK index under-performs the US by 1.3 percentage points in May.

Diary

Coming up in May we have the May Day bank holiday on the 1st (LSE closed), the two-day FOMC meeting starting on the 2nd, US Nonfarm payroll report on the 5th, MPC interest rate announcement on the 11th, and Spring bank holiday on the 29th (LSE and NYSE closed).

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The Stock Market in April

Historically, April has been one of the best months for equities. Since 1970 the average return for the FTSE All-Share Index in the month has been 2.6%, with positive returns seen in 83% of Aprils in the last 47 years. This is the best record, by quite a margin, for any month in the year. And the strong performance has continued in recent years. Since 2000 the average month return for the index has been 2.0% and, as can be seen in the accompanying chart, the market has only fallen in April in five years since 2000.

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

The average April

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.

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: Electronic & Electrical Equipment, Industrial Engineering, and Personal Goods; while the weaker sectors are Household Goods, Mining, Mobile Telecommunications, and Software & Computer Services.

Stocks

At the stock level, the four FTSE 350 with the best Aril returns over the past ten years are: JD Sports Fashion [JD.], Ashmore Group [ASHM], Aberdeen Asset Management [ADN], and Temple Bar Investment Trust. The shares of all four of these companies have risen every year in April since 2007. The FTSE 350 stocks with the weakest record in April have been: Balfour Beatty [BBY], RELX [REL], and BAE Systems [BA.].

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 13 of the past 15 years.

Holiday Effect

It’s Easter on the 16th so the LSE will be closed on the 14th (Good Friday) and 17th (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

Further articles on the market in April.

 

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The Stock Market in March

What can we expect from shares as move into spring? Well, since 1984 the market has had an average return of 0.5% in March, with returns positive in 55% 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.

Average month chart for March [1985-2016]

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.

Large cap v small cap stocks

Generally, small cap stocks 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. In March on average the FTSE 250 has out-performed the FTSE 100 by 0.9 percentage points.

Sectors

The sectors that tend to be strong in March are: Aerospace & Defense, Financial Services, General Retailers, Industrial Engineering, and Oil & Gas Producers, Oil Equipment. While weak sectors have been: Gas, Water & Multiutilities, Health Care Equipment & Services, and Nonlife Insurance.

Stocks

While, for stocks, the FTSE 350 shares that have performed the best over the last ten years in March are: Clarkson [CKN], Petrofac Ltd [PFC], and Intertek Group [ITRK], while the weakest shares have been Vectura Group [VEC], Renishaw [RSW], and Lancashire Holdings Ltd [LRE].

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.

The results of the quarterly FTSE 100 index review will be announced on the 1st; at the time of writing Capita and Dixons Carphone look candidates to be booted out, replaced by Scottish Mortgage IT and Weir Group.

Diary

Elsewhere on the diary front we have: 3rd – Nonfarm payroll report, 14th – Two-day FOMC meeting starts, 15th – Chancellor’s Budget, 16th – MPC interest rate announcement, 17th – Triple Witching, 20th – FTSE Index series quarterly changes effective, 26th – Daylight Saving Time starts.


Article first appeared in Money Observer

Further articles on the market in March.

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The Stock Market in February

Since 1970 the average month return of the FTSE All-Share Index in February has been 1.6%, with the month seeing positive returns in 64% of years. But a glance at the accompanying chart will show quite how strong the market has been in February in recent years.

Since 2009 the market has been up every February, and since 1994 market has only seen significant negative returns in three years. There’s no obvious reason why the market has been so strong in recent years in this month; although one possible explication might be that, also in recent years, shares have been weak in January and so they experience a bounce back rally in February.

Average month chart for February [1985-2016]

In an average February shares tend to rise strongly on the first trading day, then trade flat for a couple of weeks, before gaining strongly in the middle of the month and finally drifting off slightly to month end.

Mid-cap outperform large-cap stocks

A feature of February is that, with January, it is the best month for mid-cap stocks relative to the large caps. Since 2000 on average the FTSE 250 Index has out-performed the FTSE 100 Index by 1.6 percentage points in this month, and in that time the large cap index has underperformed mid-caps in February in only four years.

FTSE 100 outperforms S&P 500

On the international front, February is one of the four months in the year that the FTSE 100 Index has historically out-performed the S&P 500 Index. Since 1999 the UK index has underperformed the US index in Fenruary in only three years. Although the out-performance is somewhat attenuated once currency is taken into account as GBPUSD is historically weak in February.

Stocks

In the last ten years FTSE 350 shares that tended to be strong in February are: Hunting [HTG], Provident Financial [PFG], and Anglo American [AAL]. While shares that have tended to be weak in the month are: AstraZeneca [AZN], Workspace Group [WKP], and Vectura Group [VEC]

It’s a busy month for analysts as there are more FTSE 100 results announced during the month than any other ­ 36 companies announce their prelims in February (as do 55 FTSE 250 companies).

Aside from shares historically this has been a strong month for gold and silver.


Article first appeared in Money Observer

Further articles on the market in February.

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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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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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The Stock Market in November

November tends to be one of the quieter month for shares. After the sometimes dramatic moves in September and October, and before the traditional end-of-year rally in December, investors seem to take a pause in November. The month currently has the lowest volatility of monthly returns of any month in the year. Of course, this year may be different with the US presidential elections this month.

As can be seen in the accompanying chart, the market used to be strong in November for many years prior to 2005, but since then the market has been more likely to fall than rise in the month and has seen an average month return of -0.6%.

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

An average November

As can be seen in the following chart, on average the market tends to rise the first four days of the month, this could be influenced by investors buying into the market anticipating the strong six-month period of the year November to April (the Sell in May effect). After that the market then gives up those gains over the following few days, rises again, falls back, until finally increasing quite strongly over the final seven trading days of the month.

FTSE 100 average month chart for November [1984-2015]

Shares

In the last ten years the FTSE 350 shares that have performed best in November have been Babcock International Group [BAB], Compass Group [CPG], CRH [CRH], BT Group [BT.A], and Greene King [GNK]; Babcock, Compass and CRH have only had negative returns in November in one year since 2006. An equally-weighted portfolio of these five shares would have out-performed the FTSE 350 index by an average of 5.2 percentage points each year since 2006. While the FTSE 350 shares with the worst November performance over the last ten years have been Vedanta Resources [VED], Royal Bank of Scotland Group (The) [RBS], Tullett Prebon [TLPR], Ashmore Group [ASHM], and Standard Chartered [STAN].

Elsewhere, November has been a strong month for gold and weak for oil and GBPUSD.

Diary

This is a busy month for interim results: 64 companies from the FTSE 350 make their announcements this month.

Dates to watch for this month are: 1 Nov – two-day FOMC meeting starts, 3 Nov – MPC interest rate announcement at 12 noon, 4 Nov – US Nonfarm payroll report, 8 Nov – US Presidential Election, 24 Nov – Thanksgiving Day (US), NYSE closed, and 30 Nov – FTSE 100 quarterly review.

The big event this month will obviously be the US presidential election on 8 November. Analysis of the impact of these presidential elections on the UK market since 1972 shows that on average UK shares tends to trade stronger as the election day approaches, and then tails off in the few days following the election. The strongest day of the period has been the election day itself.

Further articles on the US presidential elections.


Article first appeared in Money Observer

Further articles on the market in November.

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The Stock Market in October

October can be a volatile month for equities. Since 1984, seven of the 10 largest one-day falls in the market have occurred in October. The largest fall happening on 20 October 1987 when the FTSE 100 Index fell 12.2%. And since 1970 the average month return for the stock market has been 0.4% ­ ranking October 9th of the 12 months. So, this would appear to bode ill for investors in October.

However, if you look at the accompanying chart you will see why averages don’t tell the whole story and how things have changed in recent years. For example, since 1992 the market has only fallen in five years (and two of those of year were the exceptional years of 2008 and 2009). And since 2000 the average stock market return for month has been 1.7%, making it the second best month for equities after April.

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

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. 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!)

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: 7 Oct – US Nonfarm payroll report (anticipated), and 13 Oct – MPC interest rate announcement at 12 noon.

And, finally, for connoisseurs of market anomalies, here’s a good one. An old Wall Street adage goes, “Sell before Rosh Hashanah; buy before Yom Kippur”. This observation was first made for the London market in 1915, and research shows it would still seem to apply in both the UK and US markets. Rosh Hashanah falls on 2 October and Yom Kippur is on 11 October.

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The Stock Market in September

After summer the stockmarket tends to burst back into life in September. Unfortunately, the renewed activity in shares tends to be on the downside. Since 1982 the FTSE All Share Index has an average return of -1.1% in this month, this gives September the worst record for shares for any month in the year. And things haven’t improved recently, since year 2000 the average month return in the month has been -1.9%.

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

However, although the average return is bad in the month, about half of all Septembers actually have positive returns. The problem is that when the market does fall in this month, the falls can be very large. For example, as can be seen in the accompanying chart, the FTSE All-Share Index has declined over 8% in three years since 2000.

Mid-cap stocks

The situation is even worse for mid-cap stocks. On average the FTSE 100 Index out-performs the FTSE 250 Index by 0.7 percentage points in September – making September, along with October, the worst months for mid-cap stocks relative to the large-caps

Although October has a reputation for being a volatile month for shares (due to some very large market falls in the month, for example in 1987), since 2000 the most volatile month for stocks by a significant margin has been September.

The average September

In an average month for September the market tends to gently drift lower for the first three weeks before rebounding slightly in the final week – although the final trading day (FTD) of the month has historically been one of the weakest FTDs of all months in the year.

In contrast to equities, gold and silver tend to be relatively strong in September.

Sectors

On the sector front, September tends to be good for Electricity stocks, Food & Drug Retailers, Mobile Telecommunications, Pharmaceuticals & Biotechnology, and relatively bad for Aerospace & Defense, Chemicals, Electronic & Electrical Equipment, General Retailers, Media, Technology Hardware & Equipment.

Diary

In the diary this month are: the US Nonfarm payroll report on the 2nd, the NYSE closed on the 5th (Labor Day), ECB Governing Council Meeting on the 8th, MPC interest rate announcement on the 15th, and it’s Triple Witching on the 16th. And, finally, Saturday 10th September will see horse racing at Doncaster – the St Leger Stakes. Of note for those investors who adhere to the adage “sell in May, go away and don’t come back till St Legers day”.


Article first appeared in Money Observer

Further articles on the market in September.

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The Stock Market in August

August used to be a good month for the stock market, but this has changed in recent years. Indeed, as can be seen in the accompanying chart, the market has fallen by over 6% in this month in two of the last five years. As it’s a month for holidays, trading volumes tend to be low for stocks which in some years can lead to some increased volatility.

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

The average August

Historically in a typical August the market tends to drift lower for the first couple of weeks and then increase for the final two weeks of the month. The final trading day of the month has historically been strong.

Sectors

The sectors which tend to be strong in August are Food & Drug Retailers, Gas, Water & Multiutilities, Health Care Equipment & Services and Household Goods; while the only predominantly weak sector is Chemicals.

Historically this has been a weak month for GBP against the USD, and also for silver.

August is the busiest month for FTSE 100 and FTSE 250 interim results announcements: 40 FTSE 100 companies and 87 FTSE 250 companies announce their interims this month.

Diary

Significant dates this month are: the MPC interest rate announcement on the 4th, US Nonfarm payroll report on the 5th, the MSCI quarterly index review announcement on the 11th, and the LSE is closed on the 31st (Summer bank Holiday).

FTSE indices quarterly review

The result of the quarterly FTSE index reviews (including changes for the FTSE 100 and 250 indices) will be announced on the 31st (this announcement of the 3rd quarterly review always used to be made in September, but since the timing was changed recently this can sometimes now take place in August,­ as is the case this year.

Olympics

The major known global event this August will be the Olympic Games. The Olympics generally have little impact on shares worldwide, but where some influence can be seen is in the shares of the host country ­ this year being Brazil. Analysis of stock markets in the year of the games shows that equities in host country markets appear to be weak in the months leading up to the games, perhaps when the media runs stories of cost overruns and missed timetables (interestingly, this has not been the case in Brazil so far this). And then there appears to be a relief rally afterwards.


Article first appeared in Money Observer

Further articles on the market in August.

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