We have all heard about the “January Effect” when it comes to the markets. The theory is, as goes January so goes the rest of the year. If there is validity in this theory then investors in our domestic markets may be in store for some good gains in the year 2012. The S&P 500 is currently sporting a gain of 4.63% for the year as of the close on January 19th.
I thought it would be interesting to look at the last 25 years and see firsthand if the “January Effect” holds water. The data was compelling enough to share, and even more interesting after it was dissected a bit further. Here are the returns of the S&P 500 for the month of January and the calendar year covering the years 1987-2011:
January | Year | January | Year | ||
1987 | 13.47% | 5.25% | 2001 | 3.55% | -11.9% |
1988 | 4.21% | 16.61% | 2002 | -1.46% | -22.1% |
1989 | 7.32% | 31.68% | 2003 | -2.62% | 28.68% |
1990 | -6.71% | -3.10% | 2004 | 1.84% | 10.88% |
1991 | 4.36% | 30.47% | 2005 | -2.44% | 4.91% |
1992 | -1.86% | 7.62% | 2006 | 2.65% | 15.79% |
1993 | 0.89% | 10.08% | 2007 | 1.51% | 5.49% |
1994 | 3.40% | 1.32% | 2008 | -5.99% | -37.0% |
1995 | 2.59% | 37.58% | 2009 | -8.43% | 26.47% |
1996 | 3.40% | 22.96% | 2010 | -3.60% | 15.06% |
1997 | 6.25% | 33.36% | 2011 | 2.37% | 2.11% |
1998 | 1.11% | 28.58% | |||
1999 | 4.18% | 21.04% | |||
2000 | -5.02% | -9.10% |
The data clearly shows a correlation between the S&P 500’s January performance and its calendar year performance. In 19 of the last 25 years you could accurately say “as went January as went the year”. Let’s dig a little deeper into the data and look at the 6 years that the “January Effect” did not hold true. I can easily throw three of those six years right out the window based upon the market conditions at the time. For example, in 2001 the year began with a January gain for the S&P 500 but then finished the year down 11.89%. What happened in 2001? The disgusting terrorist attacks of September 11th. I remember throughout that year many economists believed the economy and the markets were beginning a turnaround. In 2003, the S&P 500 had a negative January but finished the year strong with a gain of 28.68%. Where were the markets in January 2003? Near lows that occur when the baby is being thrown out with the bathwater. As in 2003, the same can be said for 2009. Coincidentally, or maybe not, in both 2003 and 2009 the market lows were reached in the month of March.
There were only three calendar years where the gain for the S&P 500 in the month of January would have been greater than the entire gain for the calendar year. Two of those years, 1994 and 2011, the difference was so marginal it is not worth examining. The other year was 1987. Why was the gain for the S&P 500 so great in the month of January 1987 and not for the calendar year of 1987? Oh that’s right, a little historical thing called the crash of ’87 occurred in the month of October that year.
What I believe the data shows is that barring the unpredictable (and no you can’t predict anything), the “January Effect” has been accurate. The correlation has only failed in years when the S&P 500 was near the end of an irrational market (as was the case in 2003 and 2009). We certainly are not coming off a year or going into a year with any such market move in our rearview mirror.
You can ignore the data but it shows that 76% of the time, over the last 25 years, the “January Effect” was real. Take out the three irrational years I previously mentioned and the theory has an 86% accuracy rate over the last 25 years. So like I said before…….I am very optimistic about the year 2012!
Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”
