Why it has historically paid to boost equity exposure in November

Since 1990 the FTSE All-Share index has seen an average return of 0.7 per cent in the month of November, with positive returns in 15 of the past 27 years. This ranks November in the middle of the 12 months for equity performance. However, in recent years the market has been noticeably weak in November.

The significant feature of November is that it marks the start of the strong six-month period of the year (November to April, an aspect of the ‘Sell in May’ effect). In other words, investors should be increasing exposure to the market (if they haven’t already done so in October).

Since 1981 the US Federal Open Market Committee (FOMC) has had eight scheduled meetings per year. Each meeting is two days long, with a policy statement released at the end of the second day (1 November this month). Many academic papers have studied the effect of these FOMC announcements on financial markets.

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One such paper found large average excess returns on US equities in the 24-hour period immediately before the announcements (an effect the paper called the ‘Pre-FOMC Announcement Drift’). According to this paper, ‘about 80 per cent of annual realised excess stock returns since 1994 are accounted for by the pre-FOMC announcement drift’ – a quite amazing finding.

A similar effect can be seen for the UK equity market as well. The average daily return for the UK market in the 24 hours before the FOMC statement is 0.33 per cent, over 10 times greater than the average daily return on all other day .

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