The Chancellor will present his budget to the nation on March 22.
If the past is any guide, the media is likely to stir up some uncertainty and fear in the run-up to Budget Day. There is nothing like government leaks, rumours and counter-rumours to drive reporters into a frenzy.
But UK investors would be wise not to let newspaper headlines influence their investment decisions in the next few weeks. History teaches that the stock market often behaves in a predictable manner around Budget Day, regardless of the headlines.
Prior 15 trading days
It is not widely known but shares often rise in the 15 trading days before Budget Day during bull market years. A bull market was running on Budget day 50 times since 1936. Shares rose in this three-week run-up 42 times or 84 per cent of the time.
The bear market record is less favourable and getting worse. Shares rose in the three-week run-up to Budget Day just two times during the last eight bear market years.
The bull market that began in 2003 recently hit a new high suggesting the bull run is currently alive and well. Assuming broad trading conditions do not reverse in the next few weeks, history suggests high odds that prices will rise between Wednesday, March 1 and Tuesday March 21, the day before Budget Day.
Prior 10 trading days
Another interesting historical trend links price gains in the final 10 trading days before Budget Day with price action in the preceding 10 days
The profit odds for the final 10 days are especially favourable if prices rose in the prior 10-day period by more than +1.7 per cent. There were 22 occasions since 1935 when shares rose by this amount or more from 20 days before Budget Day to 10 days before Budget Day. They rose in the next 10 trading days in 21 of those years.
As far as this year is concerned, The FTSE-All Shares index closed at 2984 on Tuesday February 21. No guarantees of course but if the index rises to 3035 or higher by the close on Tuesday March 7 (10 days later), prospects for the two weeks that follow are quite positive. But if the index fails to reach the target level, all bets are off.
Budget Day
Despite screaming headlines about stealth tax rises and one group or another hurt by the latest budget, shares usually rise on the big day itself.
Since 1935, the stock market rose 70 per cent of the time. The trend is almost exactly the same under Conservative and Labour leadership (72 per cent versus 68 per cent). Broad market conditions also have no affect on the odds of a rise. They rise 70 per cent of the time in bull and bear markets alike.
This positive trend would have been even better if we picked a different starting point. Budget Day often punished investors from 1936 to 1943 when sharply rising taxes and government controls led to three gains versus five declines in an eight-year period. Since 1944, prices rose 75 per cent of the time.
History teaches that Budget Day profit odds are even more favourable in certain years. The clue here is to monitor stock market price shifts in the five-day run-up to the big day. Moderate price swings, up as well as down, are usually followed by a price rise on Budget Day.
There were 25 occasions since 1944 with prior five-day price swings within a range of minus 0.7 per cent to plus 0.9 per cent. Shares rose on Budget Day in 22 of those years. Two of the three exceptions to the rule were tiny losses: -0.02 per cent in 1995 and -0.12 per cent in 2001.
Three Week Aftermath of Budget Day
Looking further ahead, a new trend emerged in 1970 which links price swings on Budget Day plus the following day with the direction of the stock market in the following 14 trading days.
During the last 36 years, small swings on Budget Day and the following day were typically followed by losses during the next 14 trading days. Here is the evidence.
There were 15 occasions since 1970 when the stock market shifted within a range of minus 0.5 per cent to plus 0.9 per cent on Budget Day and the following trading day. Shares fell in the next 14 trading days in 13 of those years. The two exceptions to the rule in 1983 and 1989 both produced small gains of just +0.6 per cent in the next 14 days.
In the remaining 21 years with bigger swings on Budget Day and the following trading day (up or down), the record for the next 14 trading days was superb - 19 advances and two declines. One of the two exceptions to the rule occurred in 1992 when an election campaign was underway with John Major's Conservatives widely assumed to be losing to Neil Kinnock's Labour party.
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