The January Effect

January 2013 was a fantastic period for equity investors, but does that mean we'll have stellar performance for the rest of the year?

IG 5 February, 2013 | 2:49PM

This article is part of Morningstar's 'Perspectives' series, which features contributions from third parties such as asset managers, academics and investment professionals.

At the beginning of January we wrote about whether there was a ‘January effect’ in stock markets. The overall conclusion was that a positive January often results in a good year overall for equities. Now that January 2013 is over, we looked again to see how the first month of this year compared with others in the past.

Excellent January Puts FTSE on Course for a Good Year

January 2013 saw the FTSE 100 gain 6.4% for the month, its best performance since 1989. In fact, the start to 2013 was one of only five Januaries when the market rose by 6% or more.  The average gain for January in the period 1984 – 2012 was just 0.53%, so the first month of 2013 got off to a particularly strong start.

The graph below shows the gain for the FTSE in each of the four years that saw a gain of at least 6%:

(Click image to enlarge)

The average gain for the four years of 1984, 1987, 1989 and 1998 was 18.8%, with the result skewed by the October crash (Black Monday), which saw the FTSE 100 shed almost all its gains for the year and end only 2% higher for the year as a whole. Even with this result included, the average gain is still much better than the overall average for the period 1984 – 2012, which we found to be 7.4%.

Yesterday’s sell-off was a nasty surprise for some, but there is still reason to be optimistic. Earnings season has had a positive tone, while central banks remain committed to monetary easing. There may be further bumps in the road, but at least we have history on our side…

This article was written by Chris Beauchamp, a market analyst at IG.

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