Tahoe-Truckee Market Beat: Looking ahead to the January Effect
The January Effect is another one of those old stock market adages used to describe seasonal tendencies in the stock market.
The January Effect is the tendency for stock prices to rise in the month of January. Small cap stocks especially have historically risen more than large cap stocks.
One reason for the January Effect is that some investors with taxable accounts may do some tax loss selling before the end of the calendar year. The tax loss harvesting can create some selling pressure that subsides once the new year begins.
The stock market also has a tendency to make most of its gains during the November through April period, so the month of January is a part of that seasonal anomaly.
Seasonal tendencies in the markets are interesting to study, but I’d be cautious basing an investment strategy on them. One reason is that stock market history and data is limited. The markets have been around for hundreds of years but the data is not readily available.
The Dow Jones Industrial average was first calculated in 1896, so next year will be the 120-year anniversary. The Dow Averages were first published in 1885.
The S&P 500 Index started in 1957. Standard and Poor’s developed its initial index back in 1923. One hundred or so years is not a lot of data for annual tendencies.
A scientist would tell you that there are not enough data points to be statistically significant. A statistician would want more like 1,000 data points.
The markets today are pretty efficient. Markets are constantly analyzed these days by high speed computers using sophisticated algorithms. Any anomalies are quickly discovered and taken advantage of.
The old seasonal tendencies are fun to study and the terminology used to describe them is interesting. Early next year, we’ll start hearing people talking about the Super Bowl Indicator and others. They’re interesting, but not worth basing an investment strategy on.
Many forecasters are predicting a relatively flat stock market again next year. As of Dec. 24, the S&P 500 is only up +0.10 percent year to date. Earnings are forecast to continue to decline in the 4th quarter then rebound in the first quarter of 2016.
How the market performs in 2016 will be determined by factors like interest rates, commodity prices, the global economy and corporate earnings.
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.