The FTSE 100 reached heights it has never before seen on the 2nd of January and is still rising as of the time of writing this article. Worldwide, indices have generally followed the same pattern.
While it's too early to determine whether the whole month of January will be a positive one for the index, if it does end up being the case, the "January Effect" may come in to play.
But what is the January Effect? The January Effect is the assertion that positive performance in the first month of the year is highly correlated with positive performance in the rest of the year and therefore the year as a whole.
According to the investment firm Fidelity:
- The FTSE 100 has risen 19 times in January, since 1984.
- 15 times out of 19, the index has been in positive territory over the remainder of the year with an average gain of 11.8% over the months in question.
- The remaining 4 years posted a loss of 10.5% on average.
Between 1900 and 2016 the January Effect was in force 65% of the time when taking the rises and falls in to account over the whole time period according to Harriman's Stock Market Almanac.
Tom Stevenson of Fidelity asserts:
“The ‘January effect’ seems to have a reasonably reliable hit rate. However, as with all stock market adages, it needs to be taken with a pinch of salt.
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The value of investments and income from them may go down as well as up and you may not get back the original amount invested.
Information is based on our current understanding of taxation legislation and regulations which is subject to change.
Past performance is not a reliable indicator of future performance.
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