“As goes January, so goes the year.” For investors that subscribe to the notion of calendar effects, Christmas and new year represent key moments in the investing calendar for taking advantage of some alleged market inefficiencies. Stock market surges triggered by the annual Santa Rally and the subsequent January Effect – together with the supposition that January is a useful barometer of market performance through the rest of the year – have long been debated forms of behavioural investing. But do the facts back up the claims?
Playing the Santa Rally…
The Santa Rally phenomenon tends to attract most attention in the US, although these days the press on this side of the pond increasingly favour it as some kind of vital year-end benchmark. The theory was originally proposed by Yale Hirsch of Stock Trader’s Almanac (the annual US investment tome), who suggested that stocks generally rise in the final five trading days of the trading year plus the first two days of the new year. While there is no definitive reason why this happens, the supposition is that investors are re-jigging their portfolios, re-positioning themselves for tax reasons and looking to take advantage of the January Effect (more on that later).
A quick glance at the markets shows that by the end of the official Santa Rally this year, the S&P 500 had moved from 1254 to 1277.81 – up 1.9%, which was a touch higher than the Stock Trader’s Almanac long term average figure of 1.6%. Meanwhile, UK investors saw the FTSE All-Share shift from 2767.77 to 2906.40 – a hearty rise of 5.0%. In preceding years, the index was broadly flat in 2007, enjoyed gains in 2008 and 2009 and was flat again in 2010.
While the prospect of a Santa Rally offers an interesting year-end distraction, more importantly it marks the beginning of the January Effect – a phenomenon that attracts rather more scrutiny among market-watchers.
Can you trade the January Effect?
The January Effect was originally mooted in 1942 by US investment banker Sidney B. Wachtel in a paper titled “Certain Observations on Seasonal Movements in Stock Prices”. Wachtel produced his findings in response to a general sense among analysts that there was no evidence to suggest that stock prices could be linked to investor behaviour at certain times of the year. By contrast, he claimed…
