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Does a great January mean a good year for the FTSE?

The FTSE 100 has soared over 6% this month. We look at the 'January Effect' to see what it might mean for the stock market in 2013.

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by Gavin Lumsden on Jan 30, 2013 at 12:25

Does a great January mean a good year for the FTSE?

Can you tell what the stock market will do from one month's worth of trading? That's the question many people are asking after an impressive start to the year for world stock markets.

The UK's FTSE 100 shot up 6.4% in January, a rise of 379 points as it has breached the 6,300 level for the first time in four years.

The startling rise comes amid a mood of growing confidence that shares are good value compared to expensive bonds and that global economic recovery may finally be in sight after a slow, grind through the aftermath of the 2008 financial crisis.

But has the FTSE rally gone too far, too fast as I wrote about last week? Will we see a 'correction' (the euphemism for a big fall) soon? What will the rest of the year bring? Is it time to sell?

Some investors love to see patterns and trends in share price and stock market movements as they pore over charts to glean buying and selling opportunities.

On this occasion history does have something to tell us and it appears to be good news.

Fidelity, the investment group, has analysed the 29 years that the FTSE 100 has been in existence. (Yes, surprisingly the benchmark blue chip index we hear so much about was only launched in 1984.)

The first of our tables (below) shows the 17 (soon to be 18) years in which the FTSE 100 has risen in January. Clearly there is something of a 'January Effect' as in 14 of those years the index went on to make further advances. That's a success rate of 82%!

Among the strongest years was the FTSE's first. January 1984 saw the index rise 6.3% from a starting point of 1,000 rising to 1,063 at the end of the month. The momentum carried on as the index gained a further 15.9% in the following 11 months. The FTSE 100 ended its first year at 1,232, an impressive gain of 23%.

Even better was 1989 in which the FTSE 100 advanced an astonishing 14.4% in January alone and continued in similar fashion to close 35% up on the year.

Of course it doesn't always work out this way. A more modest start in 1994 saw the FTSE 100 eventually retreat more than 10% over the year, one of three occasions when a positive January lead to a negative 12 months for investors.

Tom Stevenson, investment director at Fidelity, said: 'I'm pretty sceptical about these kinds of rule 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 last 30 years.'

The 'January Effect': years in which FTSE 100 rose in first month

Year 01-Jan End Jan Jan % Year end Feb-Dec % Full year % Jan Effect?
1984 1,000 1,063 6.3 1,232.00 15.9 23 Yes
1985 1,232.00 1,280.00 3.9 1,412.00 10.30 14.60 Yes
1986 1,412.00 1,435 1.6 1,679 17 18.9 Yes
1987 1,679 1,808.00 1.7 1,712.00 -5.3 2 No (rose + fell)
1988 1,712.00 1,790.00 4.50% 1,793.00 0.10 4.70 Yes
1989 1,793.00 2,051.00 14.4 2,422.00 18.10 35.00 Yes
1991 2,143.00 2,170.00 1.2 2,493.00 14.90 16.30 Yes
1992 2,493.00 2,571.00 3.1 2,846.00 10.70 14.10 Yes
1994 3,418.00 3,491.00 2.1 3,065.00 -12.20 -10.30 No (rose + fell)
1996 3,689.00 3,759.00 1.9 4,118.00 9.60 11.60 Yes
1997 4,118.00 4,275.00 3.8 5,135.00 20.10 24.60 Yes
1998 5,135.00 5,458.00 6.3 5,882.00 7.80 14.50 Yes
1999 5,882.00 5,896 0.2 6,930.00 17.50 17.80 Yes
2001 6,222.00 6,297.00 1.20 5217 -17.20 -16.10 No (rose + fell)
2005 4,814.00 4,852.00 0.8 5,618.00 15.80 16.70 Yes
2006 5,618.00 5,760.00 2.5 6,220.00 8.00 10.70 Yes
2012 5,572.00 5,681.00 1.9 5,897.00 3.80 5.80 Yes

To test the January Effect further I looked at the other 12 years in which the FTSE 100 fell in January (see second table below).

If January was really significant you might expect a negative first month to mean a bad overall year. However, this is only the case in four years, for example 1990 when a 3.5% fall in January saw the index continue to fall and lose 11.5% in the year. I've marked these years as a 'Yes?' under the Jan Effect column as they do conform to the idea that the first month influences the rest of the year. It's also worth noting that two of these bad starts led to really bad years in 2002 and 2008.

Neverthless, there are eight years when a bad January does not lead to a bad year. For example, 1995 when the index fell 2.4% in the first month but later more than made up the lost ground by chalking up a 20.4% gain for the full 12 months.

Stevenson of Fidelity agrees: 'It's a more compelling picture with the positive Januarys.'

January Effect? Bad years don't tend to follow bad Januarys

Year 01-Jan End Jan Jan % Year end Feb-Dec % Full year % Jan Effect?
1990 2,422.00 2,337.00 -3.5 2,143.00 -8.30 -11.50 Yes? (fell + fell)
1993 2,846.00 2,807.00 -1.4 3,418.00 21.70 20.00 No (fell + rose)
1995 3,065.00 2,991.00 -2.4 3,689.00 23.30 20.40 No (fell + rose)
2000 6,930.00 6,268.00 -9.5 6,222.00 -0.70 -10.20 Yes? (fell + fell)
2002 5,217.00 5,164.00 -1 3,940.00 -23.70 -22.50 Yes? (fell + fell)
2003 3,940.00 3,567.00 -0.9 4,476.00 25.50 13.60 No (fell + rose)
2004 4,476.00 4,411.00 -1.5 4,814 17.40 7.50 No (fell + rose)
2007 6,220.00 6,203 -0.25 6,456.00 4.00 3.80 No (fell ( rose)
2008 6,456.00 5,879.00 -8.9 4,434.00 -24.60 -31.30 Yes? (fell + fell)
2009 4,434.00 4,149.00 -6.4 5,412.00 30.40 22.00 No (fell + rose)
2010 5,412.00 5,188.00 -4.1 5,899.00 13.70 9.00 No (fell + rose)
2011 5,899.00 5,862.00 #NAME? 5,572.00 -5.60 -5.50 No (rose + fell)

Source for tables: Fidelity Worldwide Investment / Citywire

Where does this leave investors? As Stevenson says, these findings need to be taken with a pinch of salt. It's impossible to tell what will happen in the future. There is, though, good reason to be confident that investment returns may be good, but as always there is every reason to invest wisely and not get complacent about the ever present risks.

16 comments so far. Why not have your say?

Francisco González

Jan 30, 2013 at 16:42

As there are only 8 years where closing where below the end of January, (25%) it means that we would expect a "January effect every 75% of the years where January ends in a positive way: 82% is not different enough from the stocastic prediction to conclude that there is a "January effect"

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William Bishop

Jan 30, 2013 at 17:02

It may be better to look at the relationship between January and February-December, and not that for the year as a whole, bearing in mind that what happens in January and for the whole year are not entirely independent from each other from a statistical standpoint.

The record is somewhat impressive, although Francisco Gonzalez does make a good point above, I feel.

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Luckycontrarian

Jan 30, 2013 at 17:52

And what about the Santa Rally in December, which is known to provide a not insignificant bounce to markets.

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Jonathan

Jan 30, 2013 at 18:01

FTSE up and UK growth negative.

Reason Printing money.

In Zimbabwe 3 eggs cost 100 trillion dollars and shares a lot more. Was this good?

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Mian Ikram shakir

Jan 30, 2013 at 18:21

This is my real name.

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Geoff Downs

Jan 30, 2013 at 18:25

The FTSE and all other stock markets rise in line with US markets. If the DOW goes up the FTSE goes up, irrespective of UK economic factors.

The reports from the US, excluding today, seem to show an improvement in the economy, although many US citizens don't seem to believe the reports.

The Fed has been using QE since 2008, and intends to continue. This would suggest they think the US economy is still in trouble.

Current debt in the US is 16.5 trillion dollars. Mr Obama seems to believe you can spend your way out of this problem.

For many investors there seems a disconnect between the real economies and the markets. It seems to me as long as the Fed and other Central Banks continue QE, markets may well rise. Eventually though the markets will have to respond to the real economic news and then we may see some interesting times.

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William Bishop

Jan 30, 2013 at 19:27

Geoff Downs' comment is sound. As long as QE continues to provide a flood of liquidity that is not being utilised in the real economy, markets may continue to override at best indifferent fundamentals. I agree that eventually the music will stop, but there does not seem to be a basis for predicting when, although some technical indicators do suggest that markets are already overbought.

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Chris Adams

Jan 30, 2013 at 20:11

Given the 110% rise in the US Stockmarket since low in March 2009 (1934-37 rose 106% before slump back to 1929 lows) predicated on even more debt - Barack Obama adding one trilion dollars per year while in office - I wish to tap into the current Investment appetite of the Bulls by applying current thinking to pitch for Investment on the TV program 'Dragons Den'.....My business concept is very simple. The Investment will be in me and my Net Worth. The good news is every month I am becoming more indebted but rest assured will issue some IOU's which I will buy from myself and promise to pay for, maybe, at some time in the future.....If the Dragons are as astute as the Stockmarket Bulls they'll love it and know a good thing when they see it...........

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Maverick

Feb 01, 2013 at 15:39

Isn't somebody going to troll out the old chestnut that the markets react 6 months before the economies do?

Which is cause and which is effect?

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Rob Walker

Feb 02, 2013 at 09:21

I think these statistics prove that a good January means a good January.

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peter hart

Feb 02, 2013 at 09:41

I thought it was 18 months.

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Geoff Downs

Feb 02, 2013 at 10:09

Rob Walker,

Well said.

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Chris Adams

Feb 02, 2013 at 10:41

Caveat Emptor. This is beginning to look like the 'same old same old' media/brokers publicity machine at work. Why when the FTSE has appreciated 2500 points from the 2009 low in a relatively quiet and understated fashion would t he Professionals now come out shouting loudly from the rafters about 'The Great Rotation'out of bonds and into equities. Widows and Orphans will be the usual underwriters who pay the professionals theirLook profits as the herd pile in NOW less than 1000 point from the all time high with talk of the downgrading in UK AAA Credit rating and the implication that has on interest rates and doubts over the continuation of QE. Of course QE and low IR's was the professionals tools for their profits.The UK is losing the battle tackling its Debt burden. In the developed world , only Japan and Ireland have greater debt ratios as a percentage of GDP. Japan has its own currency. Japan Stock market lost a generation and still languishes 70% below its 1990 high. Ireland property down 50% in past four years. So what next for the UK? Recommending equities (even if the Companies trade globally) looks at best misplaced and worst - irresponsible.Look for the Stock Market to end the year sharply lower.

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Tony Peterson

Feb 02, 2013 at 11:34

I'm not recommending equities, Chris Adams.

I am just buying them.

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Moylando

Feb 02, 2013 at 18:29

Success rate of 82% ? What nonsense. Mr Lumbsden's grasp on statistics is woeful. With the intent to make a point I ( or anyone) can make statistics ( apperently) support any theory.

Of one thing I am sure - I see a bubble starting to form inflated by QE

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peter hart

Feb 03, 2013 at 08:09

Lies, damn lies and statistics but not if you have all the facts.

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