Application of the January Effect

Application of the January Effect

For long term readers of this column, you might remember the stock market January Effect from prior years. The basic premise is that if the stock market is higher after the first five trading days of January, and if it ends the month higher than the end of December, odds are quite high that the stock market will end that year with a decent increase of more than 5 percent.

The market observer who found this correlation originally in 1972 is Yale Hirsch. He noted that since the 20th Amendment (concerning the terms of presidents and Congress) to our US Constitution was ratified in 1933, as stock indexes performed during January, so went the year. Full explanations and data are updated annually in the Stock Trader’s Almanac published by John Wiley & Sons, Inc., Yale and his son, Jeffrey A. Hirsch now serving as Editor at Large and Editor in Chief. The 2017 version of which I am a satisfied owner is the 50th Anniversary Edition.

The first five trading days of 2017 ended on Monday, the 9th, this year. Although the bellwether index is the S&P 500, all three major stock indexes filled the requirement of positive results this year. We are off to a good start and most of us would probably confess that we have been pleasantly surprised by the so-called Trump rally since the initial shock that Mrs. Clinton did not win the election. Since November 9, the S&P 500 has risen 4.88 percent through Monday’s close. The Dow 30 is up almost 7 and the Nasdaq 100 higher by almost 4 percent.

Does this predictive tool really matter and if so, to whom? Since 1950, there have been only 8 years that have not followed this pattern within a margin of error of plus or minus 5 percent. That is an amazing record to 87.9 percent. But if you throw out the margin of error, the performance is still 75.8 percent. For those who really want odds to be on their side, this is definitely statistically significant. If you are already invested as you want to be and you never change anything, it at least can be mildly reassuring that you may be financially better off by December 31.

If you want to attempt to drill down a little more, let me provide some additional information. Since November 9, 2016, the only sector of 11 that has barely shown an increase is that of Consumer Defensive, sometimes called Consumer Staples, at less than .2 percent. Healthcare and Utilities, also defensive stock sectors, come in at 2.16 and 2.1 percent respectively.

The hottest sectors were these: Financial, 11.2, Energy, 9.2, Real Estate, 7, and Industrials, 6.4 percent respectively. Consumer Discretionary/Cyclical, Basic Materials, Communications, and Technology fill out the rest with increases between 5.6 and 4 percent. As you can see, the S&P 500 at 4.88 is almost at the median of the 11.

By the way, the surest instances of derailment of this barometer usually involve wars or major changes in US financial policy. But it is never a dull moment and perhaps that is why the financial markets hold my attention so well.

(Past performance is no guarantee of future results. Advice is intended to be general in nature. General market statistics from Worden Brothers, Inc., TC2000 software, 2017.)

January 11th, 2017|Categories: Economy, Investment Management|