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Sound Advice: January 19, 2022

The January Effect

What Wall Streeters refer to as the January effect focuses on both likely market performance during the year’s starting weeks and how that may set the direction for the remainder of the year.  Several studies that have examined historical numbers suggest that January does indeed lead the way to what’s ahead.  That suggestion, however, is less than compelling.

No doubt, there is a strong upward seasonal bias during the colder months.  A review of market returns over the last five decades clearly shows that the first and fourth calendar quarters of the year, on average, account for two-thirds of the recorded annual gains.  It does not, however, clearly demonstrate that any one month stands out.

Those who follow the January Effect theory argue that the yearly opener favors small company stocks.  Although there is some evidence that may have been the case quite a while back, that’s no longer true.

Others pay less attention to the differential between company sizes and offer the thought that investors tend to sell off underperforming holdings in January to lock in tax losses, but that seems silly since they would have missed the opportunity to do so in December and get the benefit sooner.  Selling in December might put pressure on stock prices, though reinvestment of those funds in January might well renew upward momentum.

Whatever the long view may be, investors always tend to focus on current developments.  As questionable as it may be, you can be certain that the media will provide reasons for market movements every single day, even if the averages rise sharply one day and drop by a similar amount a day later.  Neither of these pronouncements is of any merit, but those who follow the media demand answers, even though the words they hear are what the British call rubbish.

In the short term, the most powerful force behind market movements is investor psychology.  The critical issues investors are responding to currently are prospective increases in interest rates, dysfunction in government, COVID, supply chain disruptions, threats to the Ukraine, and inflation, just to name a few.

Sometimes markets move ahead while investors ignore the negatives.  That was the case for a good part of last year.  With the onset of 2022, however, the pendulum has swung in the opposite direction.  It will for a while and then resume its long-time advance.  

N. Russell Wayne, CFP®

Any questions?  Please contact me at nrwayne@soundasset.com

 


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