January used to be one of the strongest months of the year for shares - not so much anymore.
January used to be one of the strongest months of the year for shares. From 1984 to 1999 the average FTSE AllShare return in the month was 3.3 per cent. As the chart shows, the market only fell twice in January in those 16 years.
But after 2000 things changed dramatically. Since then the average market return in January has been -1.6 per cent and the market has seen positive returns in only six years. In four years since 2000 the market has fallen by more than 5 per cent in the month. This makes January the worst of all months for shares since 2000.
In the stock market Jauary is famous for the ‘January effect’: the tendency of small-cap stocks to outperform large caps.
Since 1999 the FTSE Fledgling index has outperformed the FTSE 100 index in January every year prior to 2015. The small-cap index underperformed large caps in January 2016, suggesting that the anomaly had disappeared. But the historical trend reasserted itself in 2017, when small caps outperforming large caps by 3.9 percentage points.
What’s in store for 2018?
Turning to the outlook for 2018 as a whole, let’s examine the historical precedents. Since 1800 the market has generally been relatively strong in the eighth year of the decade. It has been especially strong since 1958, having delivered an average annual return of 11 per cent, rising every decade until – yep – 2008. In that year the market fell by 33 per cent, which has rather dented the decennial eighth-year record.
The guidance from the centennial cycle is also encouraging. In 1718, 1818 and 1918 the respective annual returns for the UK market were 0.6, 5.5, and 11.0 per cent – a steady progression of increasing returns suggesting a return of around 16 per cent in 2018.
In the Chinese calendar 2018 will be the year of the dog, which is excellent news. Since 1950, the dog (despite the name) has produced the best record of returns of all the 12 zodiac signs. Since 1950 the average annual return for the S&P 500 index has been 16.8 per cent in dog years.
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