The January Effect
Jan 3, 2010
Posted by Jody Eisenman | Filed under Uncategorized
It’s been quite a year! The Dow Jones Industrial Average started the year at 8772 and ended at 10,428 for the best year since 2003. The bond market also staged a terrific rally, as fixed income instruments other than treasuries found money pouring into them at a record pace. For example, two year A rated bonds ended the year with an average yield of less than two percent. At some point in the first quarter, these yields were over 10%! We may never see another interest rally like this in our lifetimes. The yield curve ended on a highly sloped basis, with 30 year treasuries currently yielding more than four times two year treasuries. (4.63% vs. 1.10%).
On a sector basis, it was hard to find an area that didn’t increase in value, but technology, basic materials and consumer discretionary stocks led the rally with average returns in excess of 45%. Despite this, the average investor did not really participate in this rally unless they didn’t sell after a dismal 2008. However, more money was actually taken out of mutual funds this year as opposed to what went in. Even among so called experts, there is still a lot of healthy scepticism as to how high the market can g, which I believe is a positive sign for stocks. On the other hand, another interesting measure is the VIX, which is an indication of market volatility and investor fear. The VIX is now around 23, as compared to over 50 back in January. The last time the VIX was below 20 was in May of 2008. Between then and March of 2009, the market fell over 40%. Whatever happens, it should be an interesting 2010. Happy New Year!
One of the interesting factors on Wall Street is the so called “January Effect”. Simply put, this strategy involves buying stocks in January based on the factor that investor tend to sell their losing positions in December. From a tax standpoint, one can claim losses until the end of the year. Thus, many investors choose to sell their poorest performing stocks then. As the theory goes, by the time we get to January, there is no one left to sell, so these stocks should rise in value. Is this going to happen in 2010?
Its’ hard to say. 2008 was a very weak year, with stocks ending at their yearly lows. Despite this, the Dow fell almost 800 points in January 2009. This year, not too many people have losses in stocks. So, will there even be a January Effect this year? Time will tell.
Best wishes to everyone for the coming year
