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What January Effect?! — 7IM Short Thoughts

2 min watch

Ben Kumar, Head of Equity Strategy05 Jan 2024

Are you starting the new year with the intention of going to the gym more? Or increasing your exercise levels after an indulgent December? You’re not alone.

Each new year sees a real spike in searches for ‘gym’ and ‘exercise’ on Google. Not really surprising, given new year intentions are being talked about in pretty much every medium out there at the moment.

There is a similar phenomenon in investing - ‘The January Effect’. But, like all good new year resolutions, does it last throughout the year?

Ben Kumar investigates.

Transcript

At the start of every year, you see a very familiar thing if you spend a lot of time on Google Trends like I do. What you can see on screen is searches for ‘gym’ and ‘exercise’ in the UK. And it’s not really that surprising. New Year’s resolutions are made, people decide to get fit, so they look for their nearest gym or start looking up exercise programs.

And there’s a theory that something similar exists in the financial markets called ‘The January Effect’. What this theory says is that whatever happens to the market in January will be what happens to it that year. So, sounds pretty simple. If January is positive, the year is going to be positive, and you should invest. And if January is negative, don’t bother. Don’t bother investing at all.

But is it true? And how would you have done if you’d have followed that strategy? Well, the first thing to note, if you look at the chart on the screen, is that of the last 30 years, in 17 of them, the January effect worked. It’s got the black highlights around the bars. But in the other 13, it didn’t.

And actually, it got it quite wrong in some of them. For example, in 2021 January, the FTSE 100 lost 1%. But over the course of the year, it gained 18%. If you had followed the strategy, you’d have been sitting out of the market for that entire year as it made nearly 20%. So perhaps it’s no surprise then, that when you look at the returns from following the strategy, the January effect strategy, over the last 30 years, you would have made 280% in the FTSE 100.

If you had just put your money in the FTSE 100 on the very first day of 1994, you would have made 660% without having to worry what’s going on each January.