The January Effect: Myth or Reality?

The first few days of January, 2018 have been positive for financial markets. What does that mean for the rest of the year?

There are some who believe that as January goes for the S&P 500 (an index of 500 large US companies), it may be a signal whether that index will rise or fall for the remainder of the year.

In other words, the theory suggests if the return of the S&P 500 in January is negative, this would predict that a decline in the general US stock market for the remainder of that year, and vice versa if returns in January are positive.

Has this been an accurate and reliable indicator in the past?

Exhibit 1 shows the monthly returns of the S&P 500 Index for each January since 1926, compared to the subsequent 11 month return (from February-December). A negative return in January was followed by a positive 11-month return about 60% of the time, with an average return during those 11 months of around 7%. So, no, this is not an accurate indicator, at least when January is negative.

What other observations can be made from this data? The lessons of patience and discipline are clear.

January, 2016 was a good example of this. The first two weeks of January, 2016 were the worst ever for the Index, down (7.93%). The full month of January 2016 ended down (4.96%), the 9th worst January since 1926. However, the return of 18% for the next 11 months of 2016 resulted in a positive calendar year 2016 return of almost 13%.

Over the past 20 years, 10 of the January’s were negative. In 15 of these 20 years, the succeeding 11 months of the year were positive, not negative.

We do not believe that sound investment policy should be based on “indicators” such as this. You should not make investment decisions for a year, or the long-term, based on the market movements of any one month.

Over the long-term, the markets (both US and overseas, and across various asset classes, as we recommend) have rewarded investors who are patient and disciplined, who can look beyond indicators such as this.

Frequent changes to your portfolio or investment strategy can hurt performance. Rather than trying to beat the market based on your emotions, hunches, headlines or indicators, investors who remain disciplined, patient and calm can let the markets work for them successfully over time.

We are here to provide you with sound, reliable guidance and advice, so you can meet the financial goals of you and your family. And not just in January!

 

Source: Dimensional Fund Advisors LP

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