Will investors benefit from the ‘January Effect’ in 2015?

19th January 2015

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January marks a fresh start for stock markets and all eyes are on how the markets will set the tone for the rest of the year. This is significant as analysis shows a positive start to the year has led to further rises for the remainder of the year 83% of the time since 1984.

Fidelity Worldwide Investment has analysed the performance of the FTSE 100 since it started at the beginning of 1984 and found that stock markets have risen in the first month of the year in 18 out of 31 years. In all but three of these, the UK benchmark has gone on to record a further gain between February and December. That’s an 83% success rate, which suggests that there might be more to this than mere chance.

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.

Years since 1984 where the market has risen in January – green signifies when the January Effect has worked and red when it has not worked.

  1984 1985 1986 1987 1988 1989
31-Dec (previous year) 1000 1232.2 1412.6 1679 1712.7 1793.1
End Jan 1063 1280.8 1435 1808.3 1790.8 2051.8
End Dec 1232.2 1412.6 1679 1712.7 1793.1 2422.7
% change (Feb-Dec) 15.92% 10.29% 17.00% -5.29% 0.13% 18.10%
  1991 1992 1994 1996 1997 1998
31-Dec (previous year) 2143.5 2493.1 3418.4 3689.3 4118.5 5135.5
End Jan 2170.3 2571.2 3491.8 3759.3 4275.8 5458.5
End Dec 2493.1 2846.5 3065.5 4118.5 5135.5 5882.6
% change (Feb-Dec) 14.87% 10.70% -12.21% 9.55% 20.10% 7.77%
  1999 2001 2005 2006 2012 2013
31-Dec (previous year) 5882.6 6222.46 4814.3 5618.76 5572.28 5897.81
End Jan 5896 6297.53 4852.31 5760.26 5681.61 6276.88
End Dec 6930.2 5217.35 5618.76 6220.81 5897.81 6749.09
% change (Feb-Dec) 17.54% -17.15% 15.80% 8.00% 3.80% 7.52%

Tom Stevenson, investment director at Fidelity Worldwide Investment, said: “There is an old adage that ‘as goes January, so goes the year’. The overwhelming message from these statistics might simply be that markets tend to rise more often than they fall. However, it is hard to ignore the evidence that a positive January has led to further rises more than 80% of the time during the past 30 or so years.

“The good news for investors is that the effect is much less pronounced in reverse. In the 13 years in which January was a negative month for the FTSE 100, the market reversed that trend on eight occasions, going on to end the year higher at the end of December than it had been at the end of January. 2014 was one of those years. In five years, the down trend continued for the rest of the year.”

Years since 1984 where the market has fallen in January – green signifies when the market has continued to fall and red when, despite a negative January, the market has risen over the year.

  1990 1993 1995 2000 2002 2003
31-Dec (previous year) 2422.7 2846.5 3065.5 6930.2 5217.35 3940.36
End Jan 2337.3 2807.2 2991.6 6268.54 5164.78 3567.41
End Dec 2143.5 3418.4 3689.3 6222.46 3940.36 4476.87
% change (Feb-Dec) -8.30% 21.77% 23.32% -0.74% -23.71% 25.49%
  2004 2007 2008 2009 2010 2011
31-Dec (previous year) 4476.87 6220.81 6456.91 4434.17 5412.88 5899.94
End Jan 4390.68 6203.09 5879.78 4149.64 5188.52 5862.94
End Dec 4814.3 6456.91 4434.17 5412.88 5899.94 5572.28
% change (Feb-Dec) 9.65% 4.09% -24.59% 30.44% 13.71% -4.96%
  2014
31-Dec (previous year) 6749.09
End Jan 6510.44
End Dec 6566.09
% change (Feb-Dec) 0.85%

Stevenson added: “As seasonal indicators go, a good start to the year is as good a short term buy signal as any I have come across. However, no-one should base their investment decisions on these kinds of adages alone. Investors should focus instead on staying invested through the cycle, saving regularly and being well diversified across asset classes and geographies.”

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