A book review by Richard Gill, CFA
With another year soon to be upon us investors are welcoming the return of an annual classic, The UK Stock Market Almanac. Author Stephen Eckett has once again updated his seminal handbook in order to guide investors and traders through the markets in 2016.
As ever, the Stock Market Almanac provides a detailed preview of the upcoming year in the financial markets. The weekly goings on in the investment world, such as important economic events, expected company announcements and detailed month-by-month statistics, are all covered in a well laid out diary style format.
But the real juice comes from the unique and original seasonality analysis provided by Eckett. Here we are given a detailed and entertaining review of stock market performance throughout history and how events expected to occur in 2016 could provide investors with profit opportunities.
2016 – the year of Rio, the monkey and Donald Trump?
It seems like only yesterday that the Olympic Games were held here in London. Yet we are now only around nine months away from the next quadrennial sporting spectacular, to be held in Brazil. There is some solid economic rationale around the Olympics having a positive effect on stock markets given that host countries often spend many billions of pounds on construction, transport, consultants and many other many things which drive the economy. But with host countries typically being announced seven years before the event is held, potential investors in Brazil have already missed their chance.
However, Eckett provides an analysis of the Olympics which shows some interesting opportunities. He finds that markets typically under-perform in the months running up to the games as the media typically reports on potential missed deadlines and cost overruns, creating a negative mood. Conversely, while the games are being held stock markets of host counties have risen by an average of 3% since 1984, arguably as a “feel good factor” encourages investment.
Elsewhere in 2016 we are expecting the latest US presidential election. UK investors will be interested to know that since 1948 the FTSE All-Share has risen 14 times out of 17 in US election years, with the market typically rising in the weeks leading up to the November vote. Next year will also see the beginning of the Chinese Year of the Monkey. Since 1950 “monkey” years have seen the markets go bananas, with the S&P 500 rising by an average of 7.3%. Numerous other signs mentioned in the book suggest that 2016 will be a moderately bullish year for the markets.
How did 2015 go?
The almanac has been running for a number of years now. So investors will be interested in how the suggestions of previous years have performed.
Last year’s publication flagged up the UK general election, pointing out that the FTSE All-Share had risen by an average 0.67% on the past 11 election days, with there being an average 1.9% rise on the day following a Conservative victory. True to form, the index surged ahead by 2.37% following the Tories’ surprise victory this year.
But just as with a visit to a fortune teller, there are always predictions which don’t come true. Followers of monthly seasonality analysis will know that markets tend to perform strongly in December – the so called Santa Rally. As last year’s almanac pointed out, the FTSE 100 rose 87% of the time in December between 1984 and 2014 and had only lost value once in the previous 19 years. But December 2014 saw the FTSE fall by 2.3% as the oil price plunged and as China released disappointing growth figures.
Back to the Chinese New Year effect and the Year of the Goat, which started on 19th February, had previously seen an average return of 17.9% on the S&P 500 since 1950. But with the index currently down by 0.8% you’d be kidding me if you said these returns would be repeated this year.
History doesn’t always repeat itself
In previous reviews of the almanac I have always highlighted that, while analysis of historical data can flag up potential “anomalies” that investors could exploit to their advantage, the old saying “correlation does not imply causation” should always be remembered. Many of the anomalies highlighted in the book do have a fundamental economic reason behind their existence – volumes being light in December for example can lead to prices being driven higher. But extensive “mining” of data can always find links which aren’t really there.
In previous years, to demonstrate this effect, I analysed stock market returns following my football club, Bradford City, being promoted (incidentally there is a very good review in the July chapter of the book regarding the relationship between football and the stock market). But this year I take a different approach – the performance of stocks based on letters of the alphabet.
From my analysis of the FTSE 100 I found that if you had invested only in stocks beginning with B, S or E you would have outperformed the index every year going back to 2009 by an average of 14.1 percentage points.
Of course, this is a classic example of data mining. The way a company’s name is spelt has no influence whatsoever on its performance. The outperforming letters above were driven by strong individual performances from companies such as Barratt Developments, easyJet and Sports Direct, along with their low weighting in the FTSE boosting the index by a relatively lower amount. So I do not endorse the crazy “BSE” strategy and, as ever, recommend traditional fundamental analysis before any investment is made.
Stuff it in your stocking…
Just like in previous years the latest edition of the UK Stock Market Almanac is packed with informative, stimulating and actionable investment analysis. Readers are treated to a raft of ideas which will help them potentially gain an edge in the market in 2016. It is the ideal Christmas gift for any investor.