Will November be Friendly for Equities?

Today is the last day of October and a really busy day for many: the U.S. East Coast needs to start the clean-up of all the wreckage from hurricane Sandy; stock markets in New York have re-opened after an almost unprecedented four-day break and the night promises to be a long one with Halloween! With today also being the last day of the month, many fund managers will be trying to “dress” their portfolio’s and also clearing out old holdings to buy new assets.

As we now approach the final straight towards the the end of the year and the all important festive period gets underway which, for many companies – particularly many retailers, is a time when they generate a large amount of their profits, what chance an end of year rally? And, historically, has November really been a friendly month for equity investment?

We have collected data from the last 25 years regarding the FTSE 100, S&P 500 and Nikkei 225 to investigate just how they have performed during November & also December. Of course, past data is not any assurance of future performance but rather guidance that one may wish to take into account.

Each year is different from the others as geo-political conditions and the economic context vary substantially. This year, for example, we have a profound crisis in Europe, QE3 is being unfolded by the U.S. Federal Reserve, the terrifying fiscal cliff looms and an election is to be held next week in the US. Any of these events may be a catalyst to a sharp drop although generally it is the unforseen that typically moves markets. Nevertheless, let’s look at what happened over the last 25 years.

The FTSE 100 has risen in 13 of the last 25 years – around half the time and it has typically averaged a modest gain of 0.47%. The Nikkei rose 14 times and the S&P 15 but still nothing spectacular that we’d suggest placing a bet on. Even though the press has been repeating in recent days that we are entering the best part of the year in terms of equity performance, the above data doesn’t actually confirm that and so if November is not that good, it must be that case December is really excellent? The following table shows results for December.

The above data is pretty compelling. We can see that December has been very profitable over the last 25 years whilst November is very much hit and miss – akin to a toss of the coin really. In the last 25 years the FTSE rose 22 times in December, registering an astounding 2.69% average monthly return. The S&P 500 follows the same trend while the Nikkei, not unsurprisingly given its long bear market averaged a modest 1.11% return. The record would have been even better were it not for 2002 – a year when a crash occurred in December and all three indices wound up down around 6%. Excluding this year, FTSE was positive in every other since 1995.

If history has anything to say about what will happen, then any weakness in November, particularly around the US election period could be an opportune to incept a long position. The U.S. election has the power to be a heavy weight factor in moving markets next week aswell as the all important non farms on Friday too. If the Democratic party wins the election then the market looks to be set fair into the end of the year but if the Republicans can make it through the final hurdle then, aside from anticipated problems in the Middle East with Romney’s hardline policy on Iran, uncertainty will likely rise as investors look to evaluate just what Romney has on his cards for the US economy. It doesn’t mean a Republican win will trigger a sell off however, more likely that it will trigger some fear and uncertainty. We do think however that it will result in a rise in the oil price and so this is one to watch.

For more on the effects the U.S. election can have, you may wish to read our article “U.S. Election – Potential Impacts On The Stock Market” (http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v10_generic, page 38).