By Lucas Downey, Contributing Editor, TradeSmith Daily
The month of January can get emotional.
Holidays are over. New resolutions are struck. In the U.S., winter is in full swing… ushering in a dark dampness across the landscape. No wonder a YouGov poll found it the least popular month of the year.
While January may not be our favorite month of the year… it's key for the stock market.
The first 31 days of the year often set the tone for the rest of the year. If investors are grumpy, stocks stay slumpy… But when investors are pumpy, stocks stay jumpy.
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Why Your 2024 Resolution Should Be "Own Stocks"
Have you ever heard of the January Effect? It's a theory that suggests seasonal strength happens every January.
Some believe this is due to new money coming into the market via tax-advantaged accounts like 401(k)s and IRAs. Others point to tax-loss selling from the prior December, with capital then being put back to work in the new year.
Whatever the reason, it's a fact that the first month of the year is usually tinted green.
If you're suffering from the January blues this season, today's study should turn that frown around. History is kind to portfolios when stocks start out strong.
Let's take it one step at a time…
The table below reveals the average full-year return for the S&P 500 from 1979–2023, along with the January return.
January has an average return of just over 1%, with a 60% positive hit rate:
By these stats, any given year should hand you a solid gain. Also important to detail is the February — December finding, offering a cool average gain of 8.95%.
Not bad for more than four decades of history!
But 2024 isn't "any given year." We're witnessing a ferocious rally in January, with many stocks surging to new heights. The performance thus far is triple the long-term average.
Given the strength in the first month, I went back and focused on all positive Januarys to see how they can affect the remainder of the year.
The findings spell more pain for the down-and-out bears…
Since 1979, we've had 27 years when the first month was positive, not including this year. What happens the rest of the year is not only market-beating performance… but a higher hit rate.
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February to December returns just under 11% on average, easily besting the long-term average of 9%
From, February to December the positive hit rate jumps to 81%, from 77%
And to further drive this study home, we've put these results in a digestible graphic.
The biggest takeaway is that early strength begets better returns than average:
This study proves that momentum is real.
That's the effect that January has on markets. Our call for solid gains in 2024 is only reinforced through this lens.
Look, it's easy to get emotional in life and in markets. Fortunately, data-driven analysis cuts through the fog, offering guidance.
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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