Tuesday, January 27, 2009

The January Effect?

Where's the January effect when you need it most?
Wikipedia describes this stock market phenomenon best:

"The January effect is the tendency of the stock market to rise between December 31 and the end of the first week in January. There are many theories for why this happens, the main one being that it occurs because many investors choose to sell some of their stock right before the end of the year in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st these same investors quickly reinvest their money in the market, causing stock prices to rise. The January effect has been observed numerous times throughout history, though the first week of January 2008 was a notable exception."

A corollary to this is that the stock market's performance in the first five trading days of January determines the market's returns for the entire year. If this assumption holds, equities are destined for a flat to positive performance this year. The major equity index's return over the first five days of the first month of 2009 is shown below:

S&P 500 0.4%Dow Jones -0.1%All Ordinaries 1.9%Nikkei-225 4.3%DJ Euro Stoxx 4.4%FTSE-100 1.7%

These may not be the double-digit positive returns investors have grown accustomed to before the global financial crisis, but they are significantly better than the double-digit losses of the past two years.

But before investors celebrate, be aware that this ‘rule' has also been proven to be a fallacy. What has been determined to be more accurate is the theory that the market's performance for the entire month of January predicts the direction of equities for the remaining 11 months of the year. Statistical analysis shows that this had been correct nearly 75 per cent of the time.

This means that investors have to wait until the end of the month to see what 2009 have in store in terms of equity market return. The inauguration of US President-elect Barack Obama this coming 20 January could set the stage for a market rebound that could last until the end of the month and hopefully beyond. However, economic statistics set for release in the next two weeks are not expected to be equity-friendly either. Worse, they could show that global fortunes have deteriorated even more.Guess investors would have to just wait and see what the next fortnight brings. Then again, there's also a 25 percent chance that the next 11 months do not reflect what happens in January.

No comments: