Does the January effect still work?

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The barometer proved less good when the Index fell in January, however. The 18 times that happened, the Index only went on to produce a negative return for the remainder of the year on seven occasions. Eleven times it gained.
 

Years with a negative FTSE 100 in January

Green signifies when the January effect worked, red when not

Assimilating these results leads to the conclusion the January barometer has worked 23 times during the 40-year history of the FTSE 100, so just a little over half the time¹.

The shorter term performance of the January barometer has been distinctly underwhelming. The last time it correctly pointed to the FTSE 100’s potential was in 2020, when a sharp fall in January turned into an even bigger fall for the year as a whole.

Why is the January barometer not better? 

One reason the barometer tends to fail after bad Januarys is that the stock market has a long term propensity to rise. It follows, therefore, that the chances of the market following in the footsteps of a poor January over the remainder of the year is, on average, significantly reduced.

Perhaps it would be better to say: “As goes a good January, so goes the year”.

Can seasonal effects boost investment returns?

In a sense, looking for seasonal patterns in stock markets is a rational pursuit. As all the best search engines know, human nature is highly predictable. We tend to do or want the same or similar things at the same time each day, week and month each year.

One example of that manifests itself in a tendency for stock markets to perform better over the winter months. This effect has been explained away as being down to dark nights and poor weather making us more pessimistic. When optimism is at a premium, it’s more likely markets will be focused too much on what might go wrong, leaving room for prices to rally in the event things turn out less badly².    

Even so, where seasonal effects might occur, they usually aren’t reliable enough to act upon. They also have a habit of being too small to cover the costs of buying and selling at precise moments.

Shrinking seasonal effects are to be expected the better known they become, as any anomalies are traded away in the weeks and days leading up to when they are supposed to happen.

But the biggest problem is that when seasonal patterns fail, they can do so spectacularly, wiping out the minimal advantages gained in prior years when they worked out.

January effect or not, perhaps the best approach investors can take is to be aware of possible seasonal drivers of share prices while remaining focused primarily on the long term growth and income stock markets can provide.

It makes sense to maintain a balanced portfolio of investments able to take the rough with the smooth and come out on top over the longer term. Fidelity’s Select 50 list of favourite funds contains a wealth of ideas for doing just this.

You can discover more investment ideas in Fidelity’s Investment Outlook. The next issue, including the regular Q&A with Investment Director Tom Stevenson, will be published on 11 January. If you would like to submit a question to Tom you can do so here.

Here’s to 2024 being a vintage investment year!

Source: 

¹ Fidelity International, 20.12.23 

² Federal Reserve Bank of Atlanta, October 2003