January effect

What happens in January, happens for the rest of the year. Or so the saying goes in the investor world. 

According to Hildo Laman from IEX: “In the table below (in Dutch only), you’ll find an overview of the S&P 500 performance in every calendar year since 1957 (the year the S&P was founded). The S&P can certainly be considered the most influential index on global markets and has a fairly long historical record.

In just over 40% of the years, the S&P declined in January, which is shown in the top part of the table. In almost 60% of the years, there was an increase. Therefore, January is not exactly considered a strong month. However, in half of the years with a negative January, the year ultimately turned out to be a good one, with a positive annual return by December 31st.

If the S&P finishes January in the positive, there’s no cause for concern. It has only occurred three times that January showed a gain while the year ended with a loss. Moreover, the average market return when the year ends positively is high: approximately 17%. It’s not entirely illogical that there’s a strong correlation between a positive January and the entire year. In good market years, the results for many months of that year will also be positive. So, especially in January, which is often a strong indicator.

At the end of this month, a fairly accurate estimate can be made regarding how the year will unfold, if the S&P manages to end January on a positive note. Statistically, there’s a good chance of a positive performance for the rest of the year, although nothing is certain—especially in the stock market, where almost nothing is ever guaranteed. In case of a loss, it can get tense. Historically, in half of the cases, a negative January has been a precursor to a weak or outright poor market year. The encouraging news is that in the rest of the cases, things turned out to be fine in the end.”

Source: IEX, translation ChatGPT