Seasoned investors are likely aware of the “January effect,” a trend of the stock market to rise in January as people who sold losing stocks in December (to claim a loss for tax purposes) reinvest that money. But did you know the month can also be an economic predictor for the rest of the year?
Unfortunately, it cuts both ways. When the market is down in January, it’s a historically accurate predictor that stocks will perform poorly over the rest of the year as well:
A down January is a bad omen for the stock market. Yale Hirsch of the The Stock Traders Almanac suggests that since 1950, every down January in the S&P 500 preceded a new or extended bear market, or in some cases, a flat market. They go on to further suggest that down January’s are followed by substantial declines averaging -13%.
So far this month, the S&P 500 is down 1.4 percent since January 4 (the first day of 2010 that the stock market was open), but there’s still a full week of investing left in January. Keeping in mind there are no guarantees when it comes to investing, January is a great time to put money into undervalued stocks — especially if you’ve put off making your IRA contribution until now.
2 Comments
“January is a great time to put money into undervalued stocks”
So is February, March, April, etc…..
BTW, yes, now is a great time to get those contributions ready. You have until filing date, plus extensions.
Jeff
This is very interesting about this effect in the stock market, and one wonders why the January effect is so? Could it be conincidence? Or is it somehow setting the sentiment for the rest of the year. It highlights the importance of exceeding the index growth so that even if the indices are mediocre, your returns are better and can even be positive when the year is no so great.