Record start for FTSE 100 could set tone for rest of the year
The UK’s blue chip index hit 7,205 in early trading, which could signal good news for investors thanks to a phenomenon called the ‘January effect’.
The ‘January effect’ describes the tendency for positive markets in the first month of the calendar year to lead to positive markets in the subsequent 11 months.
Analysis from Fidelity International shows that since the inception of the FTSE 100 in 1984 the index has risen in the first month of the year in 19 out of 32 years.
In all but four of these, the UK benchmark has gone on to record a further gain between February and December. That’s a 79% success rate.
Tom Stevenson, investment director for personal investing at Fidelity International, said: “There is an old adage that states ‘as goes January, so goes the year’. While the ‘January effect’ may not have come off last year, it is hard to argue against the statistics which show that a positive January has led to further rises four out of five times during the past 32 years.
“The FTSE 100 has already risen to a record high this morning, breaking through the 7,200 mark barrier for the first time.”
However, Stevenson said there will be a two way pull for the FTSE 100 this year.
“The growth outlook is positive on both sides of the Atlantic and bond yields should continue to rise modestly. That will make equities more interesting than bonds and valuations are not excessive. Offsetting that, 2017 will be a year of significant political uncertainty in Europe, including the UK. The post-2009 bull market is long in the tooth but I expect it to continue this year.”
He also points out that despite having a reasonably reliable hit rate, the ‘January effect’ and other such adages should not be relied upon when making investment decisions.
“Investors should focus on sound investment principles such as staying invested through the cycle, saving regularly and being well diversified across asset classes and geographies,” he said.
He also pointed out that in the 14 years the FTSE 100 had a negative January, the market reversed the trend on nine occasions, going on to end the year at a higher level.
(Green signifies when the ‘January effect’ has worked and red when it has not worked.)
(Red signifies when the market has continued to fall and green when, despite a negative January, the market has risen over the year.)