Global share markets bounced at the turn of the year, with the S&P 500 (1.4 per cent), the FTSE 100 (3.7 per cent), Germany’s DAX (6.2 per cent), and Hong Kong’s Hang Seng (8.1 per cent) all recording sharp increases.
Tom Stevenson, investment director at Fidelity International said while the boost in January is typical, the 2023 result was “surprisingly strong”.
“I have long thought that investors might look through the gloomy headlines in 2023 to better times ahead, but I didn’t expect it to happen just yet,” he said.
The middle of the year, when it will hopefully be clearer that inflation is on the way down and the US Federal Reserve and other central banks are taking their foot off the interest rate brake, looked a safer bet.
“It’s a great illustration of why trying to time the market is a fool’s errand. No one rings a bell when the market turns.”
Mr Stevenson said the early year rally — dubbed the ‘January effect’ — is particularly prevalent in the UK, Japan, and Australia, where it is experienced 70 per cent of the time.
However, the analyst has acknowledged the market phenomena has no real explanation but went on to outline a few theories.
Some observers have attributed the January fillip to the sale of poorly performing investments in order to harvest a tax loss before the end of the year, before reinvestment in January.
“Plausible, except that many mutual funds report capital gains in the year to October, not December, while private investors in the UK work to an April tax year-end and to June in Australia,” Mr Stevenson explained.
Other observers have attributed the January effect to “window dressing” — replacing underperforming investments at the end of the year with more attractive stocks to “spruce up” portfolio lists at the end of a reporting period.
“This makes no more sense than tax because, for every sale, there’s a purchase of another stock. The net effect is potentially neutral,” Mr Stevenson added.
“And anyway, passive funds, increasingly important, by definition don’t do this kind of tidying up.”
An alternate explanation to the “January effect”, according to Mr Stevenson, is the “January Barometer”, whereby a positive result in the first month of the year is a sign of what’s to come.
“Supporters of the Barometer point out that since 1950, there have only been 11 occasions in which it has not worked in the US,” Mr Stevenson said.
“That’s a hit rate of around 85 per cent, which in investment is about as good as it gets.”
However, this theory is “less impressive” when considering the general tendency of markets to trend up or down.
“It would not be surprising if, in most years, the direction of travel was the same in the first month as in the other 11,” Mr Stevenson added.
The barometer may also be “self-reinforcing”, with a strong January encouraging investment activity and “shortening the odds of a strong rest of the year”.
“The problem with these kinds of seasonal adages is that they are not predictable and the trading costs of acting on them make them impractical. But eight in 10 is compelling odds,” he concluded.
