January used to be one of the strongest months for shares in the whole year. From 1984 to 1999 the average FTSE All-Share return in the month was 3.3%, and as can be seen in the accompanying chart in those 16 years the market only fell twice in January. But after year 2000 things changed dramatically.
Since 2000 the average market return in January has been -1.6% with the market seeing positive returns in only six years, and in four years since 2000 the market has fallen more than 5% in the month. This makes January the worst of all months for shares since 2000.
In the stock market this month is famous for the imaginatively-titled January Effect. This describes the tendency of small cap stocks to out-perform large caps in the month. This anomaly was first observed in the US, but it applies to the UK market as well. For example, since 1999 the FTSE Fledgling index out-performed the FTSE 100 Index in January every year until 2015. The small cap index under-performed large caps again in January 2016, suggesting that the anomaly was no more. But the historical trend re-asserted itself in 2017, with small caps out-performing large caps by 3.9 percentage points in January last year.
Outlook for 2018
Since 1800 the market has generally been relatively strong in the eighth year of the decade. It has been especially strong since 1958, with an average annual return of 11.0% and up every eight year of the decade until…yep, 2008. In that year the market fell 33% which has rather dented the performance of the decennial eighth years. Remove 2008 from the calculation, and the average annual return in eighth years since 1958 has been a stonking 19.3%.
The guidance from the centennial cycle is also encouraging; in 1718, 1818 and 1918 the respective annual returns for the UK market were +0.6%, +5.5%, and +11.0% a steady progression of increasing returns suggesting a return of around 16% in 2018!
In the Chinese calendar it will be the year of the dog, which is excellent news. Since 1950, dog years (despite the name) have the best record of returns of the 12 zodiac signs. Since 1950, the average annual return for the S&P 500 Index has been 16.8% in dog years.
And, finally, the US presidential cycle has a significant effect on equity markets worldwide, including in the UK. 2018 will be the second year in the cycle and on average the UK market has seen returns of 2.0% in the second year of this cycle.
Article first appeared in Money Observer
Further articles on the market in January.