A very Happy New Year to you all, I do hope you had a lovely Christmas with your families and for those of you who I know have had a very tough time recently, I hope you were able to get through the festive period as well as could be expected.
I am indebted to my friends at 7IM for the data in the following piece.
The calendar year – a counting system formed roughly two millennia ago* – still governs much of what we think and do.
Take, for example, New Year’s Resolutions; many of them will be about getting fitter or healthier.
And so, at the start of every year, there’s a regular phenomenon. Online searches for health-related terms SPIKE (as you can see in the Google Trends chart below). You can also see the impact of COVID lockdowns in 2020 and 2021 – “gym” searches fell, but “exercise” searches shot up
Source: Google Trends, searches for “gym” and “exercise” in the UK. Grey vertical lines show January.
It’s tempting to think that the calendar will be just as important for financial markets. So there are all sorts of “calendar effects” which people get very excited about. The Santa Rally. Selling in May.
"The January Effect" is the term used to describe a phenomenon in the stock market where there is a tendency for stock prices to increase during the month of January. It is believed to be caused by various factors, including year-end tax selling, investor optimism for the new year, and fund managers buying stocks at the beginning of the year.
So, have we found it? A fool-proof way to beat the market! Wait until the end of January, and then only invest if the market is positive?!
Sadly (and as you probably expected), NO.
The effect isn’t even that common. In the UK FTSE 100, the January Effect has occurred 17 times in the last 30 years (the bars with a black outline on the chart below). That’s only just over half the time. Might as well toss a coin!
Source: Factset. Blue bars show the total return in January, and Pink bars show the total return over the whole year.
And in terms of generating a good investment return, there are (at least) two problems with the strategy.
First, you miss some great years because of a bad January. In 2021, for example, the FTSE 100 lost 1% in January, but then was up 18% over twelve months. 1995, 2003, 2009, 2010, 2016, and 2017 were similar.
Second, even if you DO invest, you miss out on January’s return, because you’re waiting to see what happens! So even on years where you’re right, you only get 11 months of return! In 2023, the FTSE 100 rose 8% over the year. But 4% of that was in January – so waiting meant you missed out on half the return!
It’s no wonder then, that if you’d have followed this plan (only invest in the FTSE 100 if January is good), you’d have made 281% over the last 30 years, compared to the 660% you’d have made if you’d just stayed invested for the whole time!
When it comes to investing, the only purpose of a calendar is to track the number of years you've been invested. This is what really matters!
I do hope 2024 brings you all you would wish for and, as I stated in my Christmas e-mail, please remember, every minute of life is precious and will never be repeated, so take time to enjoy, be grateful for, and celebrate your existence!
With very best wishes,
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
