As goes January, so goes the year?
That certainly happened last year. Markets slumped in January, setting the tone for the remainder of the year. However, data from Moore Stephens shows that this is the exception rather than the rule. Looking at the monthly returns from the S&P 500 Index for each January since 1926, compared to the subsequent 11-month return shows a negative return in January was actually followed by a positive 11-month return about 60% of the time, with an average return during those 11 months of around 7%.
This would suggest investors shouldn’t be abandoning markets after a weak January. Moore Stephens points to 2016 when the return of the S&P 500 during the first two weeks was the worst on record for that period, at -7.93%, but rebounded 18% in the rest of the year.
However, Fidelity says a strong January may be predictive. It found that when the market has gained more than 5% in January, it has generally been bullish for stocks. There were two exceptions which followed extended periods of market growth. The problem is that it is not clear why this happens. Fidelity suggests is may be because if the market gets off to a good start, a bullish trading pattern can form, and that can help fuel continued positive performance as investors jump on the trend.
Lee Wild, head of equity strategy, interactive investor, says: “The January Effect has been hijacked by a number of different interpretations of the month as either part of an historical pattern or as a key indicator of future market direction. January had built a reputation as the strongest month of the year, perhaps due to tax planning, investing year-end bonuses, or the start of new investment strategies.
He points out that January has generally seen outperformance by small-cap stocks, with small caps beating large cap stocks for 15 straight years and, while the winning streak ended in 2015, he believes it is too early to dismiss it outright.
However, he is sceptical on the predictive powers of markets in January. He says: “Our own analysis reveals a hit and miss affair. Both the FTSE 100 and Dow Jones have replicated January’s performance over the 12 months only twice in the past five years. That’s hardly compelling.”
Wild sees three main events that will govern market sentiment in the first weeks of the New Year. First will be the Christmas retailing statistics. Next has already warned in September that the UK retail market remains volatile and is subject to ‘powerful structural and cyclical changes’. ASOS has issued a profits warning and the retail sector as a whole looks vulnerable.
The full-year reporting season in the US will also have an impact on sentiment. Will corporate earnings see any impact from the ongoing trade war or has the general strength of the recovery has remained intact? Brexit is also likely to dominate markets in the UK ahead of the MPs vote on Prime Minister May’s Brexit deal.