History lessons may shape the stockmarket in 2017

One of the strongest influences on the US stockmarket is the four-year presidential election cycle. Historically, presidents have primed the economy in the year before elections so year three of the election cycle sees a higher than usual annual market return.

By contrast, the first and second years (2017 and 2018 in the current cycle) have produced lower-than-average returns. Given the close correlation between US and UK markets, this would suggest a somewhat negative outlook for UK shares in 2017.

What other patterns can we find from history that might shape the performance of the market in 2017? One is the decennial cycle.

Since 1800 the average annual return in the seventh year of a decade has been a reasonable 2.7%, but since 1950 the seventh years have been on quite a run: the average annual return has been 16%. The last time the market fell in a seventh year was in 1957.

The stockmarket in January

The guidance from the centennial cycle is mixed. In 1717, 1817 and 1917 the annual returns for the UK market were 18, 5 and -11% respectively.

In the Chinese calendar, this is the year of the rooster, which is not a good sign for stocks. Since 1950, rooster years have been the only ones in which there has been a negative average annual return (of -4%).

Turning to the shorter term, the performance of the stockmarket in January has changed dramatically over time. From 1984 to 1999 the average FTSE All-Share return in the month (see chart) was 3.3%, and in those 16 years the market only fell twice in January.

However, since 2000 the average market return in January has been -1.6%, with the market seeing positive returns in just six of 17 years. January has been the worst month for shares since 2000.

In an average January, the euphoria of December (the second strongest month of the year) carries over into the first few days of January as the market continues to climb for a few days.

But by around the fourth trading day the optimism wears off, and the market then falls for the next two weeks - the second week of January is the weakest week of the entire year for equities. Around the middle of the third week, the market tends to rebound sharply.

The month is famous for the January effect. This is the tendency of small-cap stocks to outperform large caps in the month. This anomaly was first observed in the US, but it seems to apply to the UK market as well.

Since 1999 the FTSE Fledgling index has outperformed the FTSE 100 index in January in every year except two. However, those two weak years for small caps were seen in January in the past two years, 2015 and 2016, so perhaps the effect is on the wane?

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.