Market Beat: The ‘January Effect’ on stocks
December 26, 2017
The term, "January Effect" is another one of those old stock market sayings that describes a seasonal tendency. The January Effect is the tendency of stocks, especially small cap stocks to rise in value the first few weeks of the new year.
If you look back at market returns from several years ago, there was an outperformance for stocks in January. In recent years however, that tendency has disappeared.
There are some reasons for the relative outperformance in January that occurred years ago. One is that tax loss selling in late December created buying opportunities in certain stocks. Another factor could have been people making investments in the stock market due to making New Year's resolutions about saving and investing.
One of the best known academic studies on the January Effect was published in 1987 and was titled, "The Stock Market's Unsolved Mystery " by Haugen and Lakonishok. They researched the January Effect in great detail.
Today, these types of seasonal anomalies don't work as well anymore for several reasons. One is that as more people discover the strategy, they try to improve on it by buying and selling earlier and beating the crowd. Nowadays, the market is analyzed by super computers using artificial intelligence and any inefficiencies are quickly discovered and taken advantage of.
Investors should invest for the long haul and pay attention to the fundamentals of the economy. Right now, the forecast for 2018 is pretty bright. The major Wall Street investment firms are all forecasting a rising market in 2018 with a variety of price targets for the S&P 500 index.
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According to data from FactSet, the estimated earnings growth rate for the S&P next year should be 11.8 percent. If the earnings growth does come in that good this year, it will be the best year since 2011 when the growth rate was greater than 12 percent.
The Energy Sector should lead the earnings growth with a forecast above 40 percent. Energy is projected to be followed by Materials, Financials and Information Technology in that order. The market is fully valued right now, too with a forward PE or price to earnings ratio of 18.4, which is higher than both the five- and 10-year average.
We'll also have to keep our eye on the Federal Reserve this year. Presently, they are forecasting three interest rate increases, hopefully they won't throw us any curveballs.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.