The January Effect revisited

3 mins. to read

Now that January, with its snow, dark days and post Xmas hangover is finally behind us, we thought we would re-evaluate its performance in light of the so called “January effect” and that we first covered here on Jan 12 – The piece was missing one essential piece of data – January 2013’s performance!

If you hadn’t the time or opportunity to read our article, you may wish to take a look at it now. Using a relatively simple methodology, we collected data for the S&P 500 from 1953 to 2012 and subdivided it into four datasets ranking the data by January performance. The idea was to have a dataset with the best January performances during this period and a dataset 4 with the worst performing Januarys.

The theory proposes that “as goes January, so goes the rest of the year”, ie that the January performance is a bellwether for the rest of year’s performance. Our dataset 1, did in fact illustrate a strong relationship between January returns and the rest of the year. Let’s revisit the main stats derived from the study.

There’s no doubt there’s a clear relation between rest of year performance and January’s performance and it is a strongly positive one. The first dataset shows an average rest of the year performance of around 16.6% and which then declines as January performances do so.

The most important question now of course is where do we sit in this dataset given this year’s January performance?

The S&P 500 closed with a hefty gain of around 5% at the end of Jan 2013 and so places us just inside dataset 1, which comprises average January returns between 4.1% and 13.2%. Even though 5% is a tad below the average of 7% that dataset shows, it is still a very strong value. If history repeats, then 2013 has a good chance of being a good year for equities and still a good opportunity for who hasn’t entered from the beginning. We would recommend that you read our “Bull Market End Guide” by clicking the link at the bottom of this article to receive this.

And what about the FTSE?

In order to check how the January effect applies to the FTSE 100, we applied similar parameters to the study, adapting it to a new dataset. Unfortunately, we only have data from 1985 to present day, or 28 observations, and so reducing the quality of the results.

Comparing with the dataset we have for S&P 500, both the annual average return and average January return are much less pronounced for the FTSE 100. The average annual return was half for the FTSE relative to the S&P 500 while the average January performance was almost a quarter of its US brethren.

We divided the data into two samples. Sample 1 carries the best January’s while sample 2 is comprised of the worst January performances. In sample 1, every January was positive with an average performance of 5.05%. In sample 2, every January was negative with an average performance of -4.88%.

The average rest of the year performance is better in sample 1 than it is in sample 2, but the difference is not as significant as we expected for such data differences between the two samples and certainly not as positively correlated as the S&P 500. Basically, the market did well in any case over the data period and January is not a bellwether for year performance for the UK index it seems. As we can see in sample 2, the market actually reversed January losses in six out of ten times.

As a final note, we restate the conclusions from our past article. That is that a strong January is usually a good indication of continuing good performance over the balance of the year. With such a rise as we have seen this year in the S&P 500, we have a strong bull case. Nevertheless, we should time our entry very well and look at the big picture instead of relying solely on past data. The guide below postulates a potential scenario that could play out and provide the opportunity to ride the last cycle of this current bull market.

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