Will January really decide how the stockmarket ends 2019?

interactive investor's team of experts look back at some of January's biggest anniversaries from the past 40 years, and what January 2019 has in store for investors.

Lee Wild, Head of Equity Strategy, interactive investor, says: "The January Effect has been hijacked by a number of different interpretations of the month as either part of an historical pattern or as a key indicator of future market direction. January had built a reputation as the strongest month of the year, perhaps due to tax planning, investing year-end bonuses, or the start of new investment strategies. 

"Buying FTSE 100 stocks in January was a great strategy between 1984 and 1999 when the index only fell twice in the month, according to Stock Market Almanac, but the correlation has broken down since the turn of the century, when January has become the worst month for investors. 

“An alternative take on the January Effect points to outperformance by small-cap stocks, and here there is ample evidence to suggest the trend is very much intact. Stock Market Almanac points out that small caps beat large cap stocks for 15 straight years and, while the winning streak ended in 2015, it is too early to dismiss it outright.

• New poll: Here's where you think the FTSE 100 will end 2019
   
• Why this fund is perfect for these market conditions

"Third take on the theme is that 'as January goes, so goes the year'. Analysis in the US revealed that since 1901, January has predicted the outcome for the year 60% of the time. Gains on the first day, week and month of the year apparently stack the odds of delivering a winning year in the investor's favour. Sceptics would be right to point out that 60% is not much better than 50:50.  

"However, our own analysis reveals a hit and miss affair. Both the FTSE 100 and Dow Jones have replicated January's performance over the 12 months only twice in the past five years. That's hardly compelling."

January Anniversaries coming up

January 1, 1979 - China and the U.S. established diplomatic relations….

Rebecca O'Keeffe, Head of Investments, interactive investor, says:

"It was on New Year's Day 1979 that the US and China resumed diplomatic relations after decades of mutual distrust.  From a position of isolated backwardness, China has since catapulted itself into the ranks of modern advanced economies.

"Ironically, it is this success that is now straining relations between the two countries, with US protectionist measures introduced by President Trump attempting to curb some of the more questionable methods by which China has achieved technical catch-up in recent years.  With Chinese companies beginning to take the lead in some of the advanced technologies that will shape the world over the coming decades, it remains to be seen how western countries will adjust to this shift in socio-economic power."

15 Jan 2018 – Carillion Collapse

Rebecca O'Keeffe, Head of Investments, interactive investor, says: "The collapse of Carillion caused shockwaves throughout the outsourcing and construction sectors and those reverberations are still being felt, with outsourcer Interserve currently on the rocks and struggling to come up with a recovery plan. At the time MPs blamed the Carillion directors, accusing them of recklessness, hubris and greed. However, another review by a commons committee was more damning of government policy itself. 

"With the government spending hundreds of billions of pounds a year on outsourcing, the hope is that management of PFI projects and process has improved and that lessons from the Carillion collapse will be learnt."

19 Jan 2009 - HBOS taken over by Lloyds

Richard Hunter, Head of Markets, interactive investor, says: "In September 2008, at the height of the financial crisis, the terms of the Lloyds Bank acquisition of HBOS were announced, with the deal completing in January 2019. Much rancour surrounded the acquisition from shareholders of both banks but for different reasons. The deal was reportedly ushered through as the government agreed to waive competition hurdles, which put a question mark over due diligence as the deal was agreed so quickly. Subsequently the depth of problems at HBOS surfaced and the timing of the deal (although arguably necessary given the parlous state of the UK banking system) was questioned. The removal of the government stake which provided a bail-out for Lloyds took the best part of a decade to unwind, as Lloyds Bank returned to something like rude financial health.

"The situation at the Royal Bank of Scotland, on the other hand, is an ongoing story, where the government stake remains at over 60%."

19 Jan 1993 – VIX index goes live

Rebecca O'Keeffe, Head of Investments, interactive investor, says "Although various conversations and papers were being discussed about a volatility index for years previously, it wasn’t until 1993 that the Chicago Board of Exchange (CBOE) began publishing live data on their S&P 500 VIX index.  The VIX index measures the market’s expectation of near-term volatility for stocks that make up the S&P 500.  As such, it has rightly become a carefully monitored measure of "fear" in the global equity market.  This was never more evident than when the index pushed up above 80 in November 2008 at the height of the financial crisis.

"In recent years, QE has had the effect of dampening implied volatility, but as the Fed gradually hikes rates and reduces the size of its balance sheet, so the VIX will remain a key gauge of potential financial stress."

2016 – Dow Jones makes worst start to a year…ever

Lee Wild, Head of Equity Strategy, interactive investor, says: "The savage sell-off that greeted investors in the first three weeks of 2016 was like no other. Fears around the Chinese economy and global growth had already wiped 12% off the value of the Dow Jones in one week in August and, although the index had fully recovered by end of October, the final few weeks of the year were volatile.  And for good reason.

"Just weeks after a first Federal Reserve interest rate increase since 2006, markets reeled from further concerns about China, trouble in the Middle East and a plunging oil price. The 11% slump over the first 12 trading days of the new year was the Dow's worst start to a calendar year in its 119-year history."

20 Jan 2017 - The inauguration of Donald Trump as the 45th President of the United States

Richard Hunter, Head of Markets, interactive investor, says: "Twin surprises at the time were that Donald Trump had been elected at all, and the subsequent market reaction, where US indices went on a tear. Trump had already been seen as business friendly and he then flat-footed market watchers by his conciliatory tone on being elected.

"In particular, the financial sector – banks in particular – rallied on the prospect of lighter regulation which has to a large extent proved to be the case. Despite the sheer number and tone of his subsequent tweets, many of which have contained market moving sentiment, the US economy has indeed enjoyed a strong boost, particularly through the fiscal sugar rush of tax reforms, which saw the repatriation of significant cash holdings from overseas for US companies."

24 January 1984 - Apple releases its original Macintosh personal computer

Rebecca O'Keeffe, Head of Investments, interactive investor, says: "Forrest Gump's "some kind of fruit company" became the first trillion-dollar company in August 2018, having revolutionised the way the world communicates, although it has since fallen back from those summer highs. Back in January 1984, Apple launched its first personal computer and did so by advertising the Apple Macintosh with a Ridley Scott advert during the Superbowl. 

"It's fair to say that their product launches have always been iconic.  Right from the start the Macintosh was a success - being heralded a "revolution". Those that invested in the company then would now be sitting on a fortune - even with the recent falls."

January 2019

3rd Jan 2019 - Next Q4 Trading Statement

Lee Wild, Head of Equity Strategy, interactive investor, says "Already struggling to grow sales in the run up to Christmas, a profits warning from ASOS has dealt a massive blow to both online and high street fashion retailers. Next is not immune, already warning in September that the UK retail market remains volatile and is subject to 'powerful structural and cyclical changes'. 

Next shares have lost almost a quarter of their value since the end of November, and now look cheap assuming sales do keep growing. Forecasts are for annual mid-single-digit profit growth over the next five years, which is hardly aggressive, but fear is that near-term headwinds could threaten full-year sales and profit guidance.”

14 Jan – starts off the main US earnings season

Richard Hunter, Head of Markets, interactive investor, says:  "January 2019 will herald the onset of the full-year reporting season. Will corporate earnings continue the momentum of the previous quarters? Given the recent market swings and volatility in light of escalating trade tensions between the US and China, it will be fascinating to learn whether any economic impact has been felt by Corporate America, or whether the general strength of the recovery has remained intact.

Of equal interest will be any outlook comments or guidance looking ahead to 2019 by those companies reporting, which could well set the scene for what will likely be a challenging year."

w/c 14th Jan – UK MPs' Brexit vote

Rebecca O’Keeffe, Head of Investments, interactive investor, says: "The unwelcome gift that keeps on giving, Brexit will be yet again the primary focus of attention in January.  The Prime Minister may have survived a no confidence vote, but she is still a long way off getting any sort of consensus and the clock is ticking to try and achieve some sort of deal. 

"Trying to second guess the various permutations and combinations of Brexit has been a fool’s errand over the past few months, but what is clear is that while MPs wail and complain and spend all their time and effort on trying to leave the European Union, the UK economy is faltering and, as a result, the UK equity market remains deeply unloved."