Monday, 1 January 2018

Will the ‘January effect’ make you more money?




Dear Reader,

The second day of January seems like an anti-climax for many people.

Those Christmas and Hogmanay parties are just a memory. It’s back to work. Even if you’re glad the festivities have finished, you still have to face the New Year.

But stock market investors know that its early trading sessions can set the tone for the months ahead. And then there’s the ‘January effect’.

So what is it and will it make you more money? Let’s take a look…

There’s an old stock exchange adage that says “as goes January, so goes the year.”

That means exactly what it says on the tin. Forget interest rates, economic cycles, Trump tax cuts, Brexit…the theory here is that what happens to share prices in January determines the market’s trend for the rest of the year.

And it’s nice and simple, isn’t it? Just wait until the start of February before deciding where to put your money to work.

If January has been a positive month, you invest. If not, you don’t.

Except that, as ever with financial markets, it’s never that easy.

Sure, history will tell you that since 1929 in the US, January’s change has predicted the equity market’s annual move 73% of the time, says Standard & Poor’s data.

But maybe the concept is fading. During the past dozen years, the connection between January and the rest of the year hasn’t been at all good.

Over that period the S&P 500 - the world’s most widely-watched stock index - has seen six January drops. Yet it’s only ended the year lower in two out of those six years.

Another theory is that it’s not January overall that we need to look at. The month’s first five trading days are cited by some pundits as the key time to watch...

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