Ignore the January jump
Jan 09, 2009
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It's "the most hopeful sign investors have had for many a month", says William Kay in The Sunday Times, referring to the FTSE 100's 3% gain on 2 January. Stockmarket historians – or 'chartists' – reckon January's performance is a reliable indicator of how shares will perform for the entire year.
A study of US equities from 1940-2003 (published in the Journal of Financial Economics) showed that if the S&P 500 rises in January, it then goes on "to produce an average annual return of 14.8% over the next 11 months", says Simon Thompson in the FT. If it falls in January, the annual result averages -2.9%. Overall, using January as a predictor of share-price performance boasts an 88% success rate over the past 68 years and "persists among both large and small companies and among both value and growth stocks". So should you pile in now? No.
Firstly, if January ends up a poor month at a time when we're in "the worst bear market since the Great Depression", then 2009 could be dire. Secondly, we are in uncharted territory. So many stock-picking systems have been floored by this crisis that we would be wary of this one too. Both Yale's Robert Schiller and CLSA's Russell Napier warn of the danger of buying into short-term, bear-market rallies. Schiller believes, based on analysing cyclically adjusted p/e ratios (adjusting p/es to take account of the business cycle), that after a short rally, stock prices "could fall by half again". Saxo bank strategist Christian Tegllunf Blaabjerg agrees, predicting that the FTSE could end the year at 2,950.
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