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.

Social Share Toolbar

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.

 

Social Share Toolbar

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.

Social Share Toolbar

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.

Social Share Toolbar

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.

Social Share Toolbar

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.

Social Share Toolbar

The Stock Market in July

The old stock market adage, “Sell in May and go away” continues, “don’t come back till St Leger’s Day”. However, analysis of the historic data shows that the worst returns over this period occur in May and June. After June, returns up to St Leger’s (in September) tend to be quite flat.

In fact, after traditional weakness in June, prices quite often bounce back in July – making this month a small island of strength in an otherwise weak 6-month period. Since 1970 the FTSE All-Share Index has seen an average return of 0.8% in July, with 52% of years seeing positive returns in this month. This makes July the fourth strongest month of the year for shares.

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

As can be seen on the accompanying chart, in recent years shares have been particularly strong in this month. In the past 7 years the market’s returns in July have been over 6% in three years. Currently, July is on quite a run!

The average July

On average 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 propensity to drift lower for a couple of weeks until finishing strongly in the final week of the month.

FTSE 100 v FTSE 250

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 0.3 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 (an average of 1.0 percentage points since 1984).

Sectors

Historically the sectors that have been strong in July are Chemicals, Personal Goods and Real Estate Investment Trusts while weak sectors have been Gas, Water & Multiutilities, Support Services and Beverages.

Diary

July is a busy month for companies announcing their interim results: 23 FTSE 100 companies will be doing so, and 44 FTSE 250 companies.

On the economics front: there is the US Nonfarm payroll report on the 1st, the MPC interest rate announcement on the 14th, and the two-day FOMC meeting starts on the 26th. The New York Stock Exchange will be closed on 3rd July. And on the outside chance that England don’t win Euro 2016, fans can instead celebrate the 50th anniversary of winning the World Cup on 30th July.


Article first appeared in Money Observer

Further articles on the market in July.

 

Social Share Toolbar

The Stock Market in June

A quick glance at the accompanying chart (showing the monthly returns of the FTSE All-Share Index in June since 1984) shows that this is not a good month for shares. Historically, the May-June period has been the weakest two-month period in the year for the equity market.

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

In the nine years since 2007 the market has only risen in June in one year ­ the average June return over those nine years is -2.8%. And in June last year the index fell 6.%! This dismal record makes June the stand-out worst month for shares in recent years.

Over the longer term the record is a little better, since 1970 the average return in June has been -1.1%, but also over this period it is the only month in the year with more negative returns seen in the month than positive returns.

So, not much cheer to be expected for shares this month.

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.

Regarding sectors, despite the overall market weakness in June, three sectors have gone against the trend and seen consistent strength in the month: Beverages, Oil & Gas Producers and Pharmaceuticals & Biotechnology. But while many sectors not surprisingly experience weakness in June, none are consistently weak over many years.

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 ECB Governing Council Meeting on the 2nd, US Nonfarm payroll report on the 3rd, FOMC interest rate announcement on the 15th, followed the next day by the MPC interest rate announcement on the 16th. And not to forget Triple Witching on the 17th.


Article first appeared in Money Observer

Further articles on the market in June.

Social Share Toolbar

The Stock Market in May

It’s Sell in May time again. Already! Often stock market sayings turn out to be unreliable, at best. But the Sell in May aphorism is spookily accurate. It describes the tendency of the market to be weaker from May to October than it is for the other six-month period of the year. How true has this been? Well, in the last 33 years the saying has been right 28 times, and the average annual out-performance of the November-April period since 1982 has been 8.6%. Very few trading systems can match that record.

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

Sell in May

Usually stock market anomalies, once they have been identified, don’t last long. But the Sell in May effect has been around for decades ­ one academic paper found evidence of it in the UK market starting from 1694. And the effect is currently as strong as ever. For example, for the latest period: the FTSE All Share Index was up 7.3% over the six-month period Nov 2014 to Apr 2015 and down 7.3% for the following period May 2015 to Oct 2015 (a rather oddly symmetrical performance!)

Given the strength of the Sell in May effect it is not surprising that May itself is one of the weakest months of the year for shares. There are only three months where, since 1970, the market has an average return of below zero in the month – May is one of them (the others are June and September). On average the market falls -0.2% in the month, and the probability of a positive return in the month is below 50%. Since year 2000 performance has been even worse, with an average return of -0.6% for the month.

It’s not immediately obvious why May has been historically weak for the stock market. The month is weak for most stock markets worldwide, so whatever the reason it’s unlikely to be anything UK-specific, such as the timing of the UK’s financial year.

The average market in May

On average in May the market trades fairly flat for the first two weeks of the month, and then prices drift lower in the second half ending with the weakest day of the year for shares on 30 May (although the LSE will be closed this year on that day for Spring Bank Holiday).

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 1.9 percentage points in May.

Stocks

Over the last ten years, strong sectors relative to the general market in May tend to be Aerospace & Defense, Electricity and Food Producers; while the weaker sectors are: General Industrials and Life Insurance.


Article first appeared in Money Observer

Further articles on the market in May.

Social Share Toolbar

The Stock Market in April

April – one of the most exciting months for investors! Five years ago April was the strongest month for the stock market in the year, but it now ranks second behind December. The two months have been switching first and second places for quite a few years now. For the last few years it has been December, but April is not far behind. Interestingly, this characteristic is not unique to the UK market; a study of 70 markets worldwide found that the strongest months for shares were (in descending order) December, January and April.

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

On average the market rises 1.8% in this month; and the probability of a positive return in the month is 71%. Since 2003 the market has only fallen three times in April; although this doesn’t match the earlier performance: from 1971 the market rose in April every year for 15 years – a recent record for any month.

As can be seen in the chart, the strength of the market in April has been fairly constant since 1984 apart from in a few years.

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.

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 (in 2015 the FTSE 100 out-performed the US index by 5.1 percentage points).

April also often sees strong performances by sterling against the dollar and oil.

The seasonality significance of April is that it the last month in the strong part of the six-month cycle (November-April), that is a feature of the Sell in May Effect (called the Halloween Effect in the US). Therefore investors may be reducing their exposure to equities ahead of May.

Diary

In the diary this month we have US Nonfarm payroll on the 1st, MPC interest rate announcement on the 6th, and the two-day FOMC meeting start on the 26th.

Anniversary-wise, 40 years ago this month in 1976 the first Apple computer, the Apple I, was released. In the same month James Callaghan was elected prime minister and long-end  gilt yields were 15%.


Article first appeared in Money Observer

Further articles on the market in April.

Social Share Toolbar