The Stock Market in January

It would seem that the dot-com crash in 2000 had a big effect on the performance of the stock market in the month of January. Up to that point, January had been one of the strongest months of the year for the market, but now it is ranked ninth of all the months. This can be seen in the chart above: in the years 1982-1999 the market only fell in January twice, but in the 14 years since then the market has only risen this month in 5 years. So, if taking history as a guide for the performance of the market in January it is necessary to decide whether to look at the short or longer-term

Monthly returns of FTSE All Share Index - January (1982-2013)

January follows the strongest two-week period of the year (the second half of December); and this exuberance traditionally carries over into the first few days of January as the market continues to climb for the first couple of days. But by around the fourth trading day the exhilaration is wearing off and the market then falls for the next two weeks – the second week of January has been the weakest week for the market in the whole year. Then, around the middle of the third week, the market has tended to rebound sharply.

Small caps like January

Mid-cap and small-cap stocks tend to out-perform large cap stocks in this month (called the January Effect). On average, since 2000 the FTSE 250 Index has outperformed the FTSE 100 by 2.3 percentage points in January – the best out-performance (with February) of all months. Small caps do even better, out-performing the FTSE 100 by an average 3.7 percentage points in the first month.

January effect

There are two other interesting anomalies in the month (that are also sometimes, and confusingly, called the January Effect). The first is a famous market predictor in the US which holds that the direction of the market in the whole year will be the same as that for the first five days of January. Research shows that the same rule works more or less for the UK market as well. The third effect comes from a U.S. paper written in 1942 which proposed that stocks rose in January as investors began buying again after the year-end tax-induced sell-off. As we’ve seen above, that has been less true in recent years. (More detail on January effects.)

Sectors

In the last twenty years the sectors that have been strong in December have been: Construction & Materials, Financial Services, and Media; while the weak sectors have been: Beverages, Food & Drug Retailers, and Food Producers.


Article first appeared in Money Observer

Further articles on January.

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