Investment Engine
With relief we move on from September – the month that on average has the worst returns in the year – to the fourth calendar quarter (4th Quarter) which is the engine that drives the majority of investment returns. The best stock pickers will be successful in almost any market but it will, I suspect, be argued that it is factors such as the 4th Quarter Effect that shows that ‘passive management’ works.
The Halloween Effect (Sell in May)
The 4th Quarter is the first half of the strange six-monthly seasonality effect, which, it might be argued, should not exist in a modern, efficient market. The UK Stock Market Almanac (the Almanac) reports an academic paper published in 2012 (Jacobsen, Ben and Zhang, Cherry Yi, The Halloween Indicator: Everywhere and All the Time) that found evidence for the effect in 81 out of 108 countries and that it was statistically significant in 35 countries.
A Decade of the FTSE 100
Our statistics come from ShareScope which subscribes to the FTSE Index series which includes, of course, the FTSE 100 index. The FTSE 100 index is one of the most widely used stocks indices although, since a large number of the constituents are international companies, the index’s movements are a weak indicator of the business prosperity or economic strength of UK plc.
In the past ten years eight of the calendar months October to December, described as the 4th Quarter, have produced a positive return and two a negative return. Of the two negative returns, 2007 was falling from the highest point since 2003 and 2008 was just part of the 47% fall that ended in March 2009.
What Now?
You might say the numbers have started rather well for a positive return in the 4th Quarter 2014 because the FTSE 100 index was 6446 on 2nd October, which is the lowest it has been since 9th October 2013. Thus, there is plenty of opportunity for the index to rise from now to 31st December.
The more cautious might see that as the start of something worse because the index has broken clean out of a 15 month rising channel and the potential support level is lower at around 6,000.
So What?
I would normally recommend that the 4th Quarter is a time to be fully invested in equities within the agreed asset allocation. However, because of the previous paragraph, if there is cash available today, then wait a week or two.
Disclaimer: This material is published by Raymond James Investment Services Limited (RJIS) for information purposes only and should not be regarded as providing any specific advice. Opinions constitute our judgement of this date and are subject to change without warning.