After suffering sizeable losses in October, history would suggest the FTSE 100 will bounce back this month, although the longer-term outlook is a little more gloomy.
The blue-chip index fell 5.1% last month, but it has advanced slightly so far in November, in keeping with historical trends.
Initial bounce
When the Footsie sustained similar losses before, it has, on average, risen 1.9% in the month immediately after, according to data compiled by AJ Bell investment director Russ Mould.
The performance tails off further down the line though, with the index generally edging 0.5% higher over the next three months, and 0.4% in the six months after the dip.
A year on from the initial drop, and the FTSE 100 tends to have given up the initial gains and fallen even back by 2.6% on average.
“This now begs the question of whether this latest sharp decline is a chance to ‘buy on the dip’ and follow a strategy that has worked so well since this bull market began in March 2009,” says Mould.
Investors who are inclined to ‘buy on the dip’ will take heart from the 5.2% monthly fall seen in July 2010, when the FTSE 100’s value rose by almost 21% over the following 12 months.
Stick or twist?
There have also been some shockers though: had you have ploughed in after September 2000’s 5.7% drop, your investment would have been worth 22% less a year later, while the Footsie fell by a third in the year after November 2007’s 4.3% dip.
“Anyone who thinks this is not a major downturn will be inclined to pile in and take their chances, albeit in the knowledge that bear markets (just like recessions) only tend to become obvious with the benefit of hindsight and that history is not guaranteed to repeat itself,” added Mould.
“Those of a more nervous disposition may prefer to sit on the sidelines, gather more evidence and assess exactly how much risk they wish to take at this stage of the economic and stock market cycle, nearly ten years into an upturn on both counts.”