Monthly seasonality of FTSE 100 Index

Does the FTSE 100 Index display a monthly seasonality?

[We last looked at this in 2014, so time to see if anything has changed.]

Positive returns

The following chart shows the proportion of months that have seen positive returns for the FTSE 100 Index since 1980. For example, the index rose in April in 28 years since since 1980 (76%).

FTSE 100 Index positive returns by month [1980-2016]

Broadly, the pattern of behaviour has not changed greatly in the last two and a half years. The months which have seen the highest number of positive returns are still April, October and December.

But in recent years, since 2000, February has been getting relatively stronger, while January and March relatively weaker. Since 1980, the proportion of positive return months for January is 59%. but measured from 2000 the figure falls to 35%.

Average returns

The following chart plots the average month returns for the FTSE 100 Index for the period 1980-2016. For example, since 1980 average return in January of the index has been 0.9%

FTSE 100 Index average returns by month [1980-2016]

Similar to the previous study, the standout two strong months of the year since 1980 have been April and December. Although since 2000 the performance of December has been dropping off and has been over-taken by October as the second best performing month in recent years.

The months with the lowest (in fact, negative) returns are still May, June and September. Again, things have changed slightly in recent years, with January equal with September as having the worst average returns since 2000.

The following chart is similar to the above (in that it plots the index average returns by month, the short brown horizontal bars), but it adds a measure of the extent of variation away from the average for each month (the measure is 1 standard deviation).

FTSE 100 Index average returns by month (1SD) [1997]

An obvious observation to make is that the variability of returns around the average are very large for all months. The months that have seen the greatest variability (i.e. volatility) have been September and October, and to a slightly lesser extent January. The months with the lowest variabilility have been April and December.

Cumulative returns

The following chart shows the cumulative returns indexed to 100 for each month. For example, £100 invested in the FTSE 100 only in the month of April from 1980 would have grow to £217 by 2016.

This is not meant to represent real-life investable portfolios (e.g. transaction costs are not included), but to illustrate the large effect the returns differences can have on cumulative performance over a long term,

FTSE 100 Index cumulative returns by month [1980-2016]

Notes

  1. The superior returns for April and December can be clearly seen on this chart. Indeed, the close correlation of returns for the two months is remarkable, and rather odd. However, as can be seen, due to the recent couple of weak years for December, performance has been diverging between the the two months.
  2. The most striking change in behaviour is undoubtedly that for January. This was the strongest month for the FTSE 100 Index until the beginning of the millennium, since when its performance has fallen off quite dramatically.
  3. In a less dramatic fashion (than January) the returns for November have decreased strongly since 2005.
  4. The months represented by dashed lines are the six months May to October. These lines can be seen to largely occupy the lower part of chart – which supports the Sell in May effect.
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Monthly performance of FTSE 100 Index

Does the FTSE 100 Index display a monthly seasonality?

Average returns

The following chart plots the average monthly performance of the FTSE 100 Index for each month over the period 1980-2014. For example, over the 34 years from 1980 the average return of the index in April was +2.2%, and in May it was -0.3%,

FTSE 100 Index average returns by month [1980-2014]Notes

  • The highest average return was seen in April (+2.2%), closely followed by December (+2.1%).
  • The lowest average return was in September (-1.1%). Only three months (May, June, September) had negative average returns over the period.
  • The Sell in May (Halloween) effect can be seen illustrated here: the period May-Oct is the weaker half of the year, and Nov-Apr the stronger half.

Positive returns

The following chart plots the proportion of monthly returns that were positive for each month. For example, the index rose in April in 74% of the years since 1980, and in 47% of the years for May.

FTSE 100 Index positive returns by month [1980-2014]Notes

  • As can be seen the overall relative profile of strong/weak months is the same as that for the average performance figures. The one difference is October: here the month has the second highest proportion of positive monthly returns, but (from the first chart) ranks only sixth in terms of average returns. This reflects the fact that the market is generally strong in October, but its average return is brought down by the occasional very large falls in the month (e.g. 1987).

Cumulative returns

The following chart shows the cumulative returns indexed to 100 for each month. For example, £100 invested in the FTSE 100 only in the month of April over the period 1980-2014 would have grown to £203, while in May £100 over the 34 years would have fallen in value to £88. The six months of the weak half of the year (according to the Sell in May effect) are indicated with dashed lines.

FTSE 100 Index cumulative returns by month [1980-2014]Notes

  1. The observations from the first two charts (i.e. the strength of Apr and Dec and the weakness of Sep), can be seen clearly in this chart as well.
  2. Historically, January was the strongest month of the year (and this is still the case in some countries).As can be seen, January was the strongest month for the FTSE 100 Index until the beginning of the millennium, since when its performance has fallen off quite dramatically.
  3. Until 2005, November’s cumulative return was close to that of December’s.
  4. The low volatility and close correlation of April and December returns are striking.
  5.  Very broadly, the collection of dotted lines towards the bottom on the chart supports the Sell in May effect (i.e. the market is relatively weak May-Oct).

See also

Other articles on the Sell in May effect.

 

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