Each year, investors and pundits consistently dole out a bread and butter piece of market wisdom, something along the lines of, “So goes January, so goes the year.” This ranks up there with “Sell in May, Go Away,” and the “Santa Claus Rally” among the popular nuggets to guide investors and traders through the minefield. Though January is still young, we thought it might be interesting to look at some of the data for ourselves and see if January performance offers any clues for the rest of the year. Is there such thing as a January effect?
To look at the January effect, we used simple S&P 500 yearly and monthly returns going back to January 1950 providing 64 January and yearly performance data points (Side note: we tend to use the S&P 500 because the historical record is much longer than the international indices). Over that 64-year period, 23 Januaries posted negative price performance. Granted, it’s not a massive sample size, but it’s something to work with.
Now, let’s get into the data.
Looking at overall yearly results lined up with positive or negative Januaries is somewhat supportive. Out of the 23 years with negative Januaries, 12 posted negative overall years and 11 ended in positive territory. Of the 41 years with positive Januaries, 36 were positive, nearly 90%. Surely, the record following negative Januaries is a coin toss, but keep in mind that only 17 out of the total 64 years overall were negative (26.5%), and 47 were positive; there’s a positive bias to the yearly numbers to begin with. The odds for a negative or positive year following a negative or positive January are higher than the odds for a positive or negative year coming into the year in general.
The actual performance data from the 23 years with negative Januaries is interesting. Since 1950, the average annual return for the S&P 500 is 9.1% and the median is 12.04%. For the 23 years experiencing negative Januaries, the average comes in at -3.76% and the median -2.97%, a very large difference. Ultimately, we found the source of that gap interesting. Overall, the 47 positive years since 1950 averaged returns of 17.1%, with a median of 15.63%. However, the 11 years that turned out positive following a negative January only posted average returns of 8.74%, with a median of 4.46%, far below their positive year compatriots. The 17 negative years since 1950 posted average returns of -13.02%, with a median of -11.50%. The 12 negative years with negative Januaries posted average returns of -15.22%, with a median -11.66%, not much different than the numbers for all negative years. Therefore, for whatever reason, a negative January really seems to constrain the potential for upside during positive years.
Going to the positive side, a positive January seems to take the edge off an overall negative year. Years that turned out negative after posting positive Januaries show average returns of -7.76% and a median of -9.30%, less than the overall average and median for negative years. Conversely, positive years with positive Januaries come in better than the overall average and median. The average performance is 19.65% and the median is 19.02%.
To keep the numbers straight, we’ve included a table below:
S&P 500 PERFORMANCE, 1950-2013
|
|||
Average
|
Median
|
||
Overall
|
9.10%
|
12.04%
|
|
Positive Years
|
17.10%
|
15.63%
|
|
Negative Years
|
-13.02%
|
-11.50%
|
|
Yearly Performance after a Negative Jan.
|
-3.76%
|
-2.97%
|
|
Negative Jan., Positive Year
|
8.74%
|
4.46%
|
|
Negative Jan., Negative Year
|
-15.22%
|
-11.66%
|
|
Positive Jan., Positive Year
|
19.65%
|
19.02%
|
|
Positive Jan., Negative Year
|
-7.76%
|
-9.30%
|
We’ve thrown a lot of numbers out there. What’s the quick takeaway for us? Obviously, if January 2014 closes negative (the S&P 500 is down about 0.3%), it doesn’t mean it’s time to close shop for the year and run for the hills. Exercises like this can be opportunities to exercise our creative gene and have some fun with market data, but shouldn’t be taken as a catalyst to make wholesale, major investment changes. However, a negative close would be another bit of evidence to sock away that 2014 might be much more of a wrestling act than the past few years. As we’ve seen above, the performance record for years with negative Januaries, whether they turn out positive or negative, is much lower than the overall performance record. For some reason, the animal spirits of January, or lack thereof, seem to spill over. There are a few weeks left, though, plenty of time for markets to move up, up and away (hopefully).
