DIY Investor Magazine
/
December 2015
12
THE UK STOCK MARKET
ALMANAC 2016
Seasonality effects and
anomalies in the UK stock
market
Those looking for a stocking
filler for the trader in their
life could consider a gift that
keeps on giving. The latest
edition of Stephen Eckett’s
fascinating reference work
delivers a comprehensive guide to the next financial
year and vital information for all investors and traders
looking for the little edge that could make a big
difference.
Herein are a flavour of some of the trends that are
identified in the latest edition which also considers the
potential ‘Sell in May’ effect, Chinese New Year and the
Olympics.
THE JANUARY EFFECT
In 1976 a study of equally weighted indices of
stocks on the NYSE had significantly higher
returns in January than in the other 11 months
over the period 1904-1974, indicating that small
capitalisation stocks outperformed larger stocks in
January.
In 2006 what is now known as the ‘January Effect’
was tested on data from 1802 which found the
effect was consistent up to the present time.
SO, DOES THE JANUARY EFFECT WORK FOR
UK STOCKS?
The following chart shows the cumulative
performance from 1995 to mid-2015 of four stock
indices in just the month of January, from FTSE
100 to Fledgling. A portfolio investing in the FTSE
100 in just the Januaries since 1995 would have
fallen 18.4% in value by mid-2015. By contrast,
similar portfolios investing in the FTSE 250, Small
Cap and Fledgling indices would have returned
11.2%, 39.5% and 66.1% respectively.
This suggests that not only does the January Effect
hold for UK equities but also that performance in
January is inversely proportional to company size.
Elsewhere, analysis suggests that if January
market returns are positive, then returns for the
whole year will be positive (and vice versa). This
is sometimes called the January Predictor or
January Barometer. 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.
US PRESIDENTIAL ELECTION YEARS
The UK and US markets are very closely
correlated and, as a result, the most important
predictable event affecting the UK market in 2016
will be the US presidential election.
The Almanac highlights the performance of the
FTSE All-Share index over the 12 months of a US
election year and shows that since 1948, the UK
market has risen 14 times out of 17 (82%) in US
election years, with a rather extraordinary average
annual return in those years of 32.7%.
Generally, the UK market tends to rise in the few
weeks leading up to the election.
