Watch out for January
Research by Investment Solutions and other market commentators using financial and industrial data spanning over 40 years, has identified two unusual phenomena affecting returns on local and global equity markets.
They are so noticeable and have occurred over the years with such regularity that specific terms have been coined to describe each: "The January effect" and "The sell-in-May-and-go-away" rule of thumb.
Glenn Silverman, chief investment officer at Investment Solutions explains: "Five of the 12 months, December to April, account for about 40% of the days of the year, but they account for almost double that in terms of returns.
Consequently, some 80% of total annual returns are made, on average, from December to April, with the bulk coming specifically in December and January -- hence the term "January effect". From 1960-2003, the FINDI has returned, on average, 12% per annum, excluding dividends.
Remarkably, 4.9%, some 41% of the total, has, on average, over this time been earned in December and January alone.
The corollary to this is that the months May to November (60% of the year), on average, account for only 20% of annual returns, with June the weakest month. Consequently, market timers/commentators have coined the phrase "sell in May and go away" to benefit from this phenomenon."
Scientific explanations for the "January effect" are also sorely lacking, so investors need to be cautious when applying it to trading strategies. He says investors should also not apply either phenomenon to longer-term investments, where a clear non-trading strategy should be in place.
"What does seem apparent, though, is that the "January effect" was present in December 2003 and January 2004. While local and global equity markets have been recovering since the start of the second quarter of 2003, the pace increased quite dramatically in December and January.
In December, the FINDI returned 5.3% and in January the return was 4.5% -- a total of 11.5% in two months. Not bad, considering the poor equity markets of the previous five years," he says.
Taking the "January effect" into account, Investment Solutions is expecting 2004 to be a year of two parts - a better first, though not necessarily equal, part and a far more muted second part, especially globally.
Silverman says there is now sufficient evidence of a synchronised global recovery, with a powerful turnaround in corporate profits.
"This is likely to support global equity markets in the first part of the year, as the positive macroeconomic dataflow materialises. Nevertheless, equities are far from the extremely oversold positions in the first quarter of 2003."
According to Silverman the global outlook for the second part of the year is far murkier, and of major concern is what 2005 will bring.
US growth and corporate earnings momentum is likely to top out in 2004. With equities tending to price economic expectations in advance, and valuations on US equities looking increasingly stretched, the market and investors will at some stage begin to factor this into their views.
"Typically, this is likely to be overdone, leading to valuations becoming stretched, sentiment becoming too buoyant and the less informed climbing on the band wagon, leading again, inevitably, to a cycle reversal.
And so the market continues on its natural, seemingly pre-destined "up and down", "bull and bear" and "exuberance and depression" cycles," he explains.
