Morningstar's 'Perspectives' series features guest contributions from third parties such as asset managers, academics and investment professionals. The below article was written by Fidelity Worldwide Investment.
Investors who bought into equity markets at the end of December in the belief that they could benefit from a ‘January Effect’ made the right decision this year, with the first month of 2013 looking like it will be the best January since 1998. The January Effect is sometimes described as a tendency for share prices to rise in January as a result of increased buying following a drop in price that typically happens in December. Another version of the January Effect claims that when shares rise in January the odds are stacked in favour of them rising during the remaining 11 months of the year.
The big question for investors now is whether this year's strong performance can continue for the rest of 2013, or whether now is the time to sell equities in favour of perceived safer havens?
Fidelity Worldwide Investment has analysed the performance of the FTSE 100 since it started in 1984 and found that stock markets have risen in the first month of the year in 17 out of 29 years, with this year likely to make it 18 out of 30.
Most interesting for investors is the fact that in all but three of the 17 years equity markets have continued to grow in the 11 months following a positive January, suggesting that there really might be something to the January Effect. 14 out of 17 is an 82% success rate.
Years since 1984 in which the market has risen during January (green signifies further gains during Feb-Dec. Red signifies a fall in the 11 months following a positive January):
(Click on image to enlarge)
Tom Stevenson, Investment Director at Fidelity Worldwide Investment, comments: “January has got off to an excellent start for investors, with the FTSE 100 breaking through the high point of just under 6,100 reached in 2011 and moving safely back into pre-financial crisis territory.
“I'm pretty sceptical about these kinds of rules of thumb, but it is hard to ignore the evidence that a positive January has led to further rises more than 80% of the time during the past 30 years.”
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