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Does January market performance really provide insight for the year ahead?

9 months ago

Adrian Lowcock, Investment Director, Architas:

What is the January effect?

The saying “As goes January, so goes the year” suggests that the market will end the year positive if it is positive at the end of January. Likewise a negative start suggests a negative year overall.

Is there any substance to the saying?

Since 1984, the January effect has been true 68% of the time for the FTSE 100, so it has been correct seven out of every 10 years. However, there does seem to be some changes in the resilience of this trend. Prior to January 2000 the effect was true 81% of the time but has become less reliable since and in the years following the global financial crisis it has only been true half the time.

There is a good reason for this change in frequency of the January effect. The 1980s and 1990s saw a period of strong markets. Markets were rising so the tendency was for markets to be up both in January and for the year. But since 2000 markets have been more volatile trading sideways for a long time. But they have been exposed to two big corrections in the form of the dotcom bubble and the financial crisis. This has made short term performance a poor guide for the long term.

There is no logical reason why the January effect should exist at all. The idea that what happens in January should have so much bearing on markets for the rest of the year seems ludicrous. We know too little about how this year will unfold. In the UK Brexit negotiations will move to trade and given the complexity of the negotiation process it is hard to imagine these will go entirely smoothly. While in the US predicting what President Trump will do or say next is a fool’s game. At present it is within the realms of possibility that we see him impeached before the year is out, but equally he may defy his critics. There are just too many unknowns that could change the outlook and performance of markets.

Another consideration is the saying only points to the year being positive if the month of January ends positive and vice versa. This does not necessarily mean the year will continue the strong run. For the saying to be true all you need is a positive market in January and the same again for the rest of the year, but you could have the best returns in January only for most of that to be given back over the next 11 months, so the returns for the rest of the year are negative.

For more information, call us on 020 7562 4900, calls may be recorded.

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