The January effect is a hypothesis that the stock market tends to perform better in the first month of the year. The effect was first observed in 1942 by investment banker Sidney B. Wachtel and that small-cap stocks tend to outperform the broader market in January.
There are a few reasons why stock prices tend to rise in January but I wanted to find out if the January effect holds true in Singapore as in the US
Can investors simply ride the January effect and make decent gains simply by investing in the STI for the first month of every year?
I decided to do some research: I had a look at the STI chart and recorded how much the STI gained (or lost) from its opening price on Jan 1 to its opening price on Feb 1 from 1990 to 2015.
Does the STI rise every January and, if so, by how much? Here are the results:
From the data over the last 26 years:
- The STI made gains in the month of January for 15 out of 26 years
- The STI remained flat in January for three of those years (1997, 2009, 2011)
- The STI made losses for 11 out of 26 years
So it seems in the overall scheme of things, the STI does tend to rise in January. And in the years the STI posted gains in January, the average return was 5.39 per cent. Pretty damn decent!
However, when you include all the flat/losing years, the overall average return is only 0.42 per cent.
The reason for this? The STI suffered double-digit losses in 1995, 1998, 2000, and 2008 which pulled overall returns down. If you recall, we had Nick Leeson sending Barings Bank to oblivion and the Kobe earthquake in 1995, the Asian Financial Crisis in 1998, a prelude to the Dotcom Bubble in 2000, and Global Financial Crisis in 2008.
So what does this mean for investors like us?
Bottom line, the STI does tend to rise in January but the moment the bad news seems to be getting out of hand, it's best that you get out!
The Fifth Person is a digital investment magazine that publishes the latest investment news, stock analyses, AGM reports, and financial education.
Visit The Fifth Person to learn more and how to make smarter, more profitable investment decisions.