January 2012 showed the biggest percentage gain in the DOW and S&P in the last 15 years. Could this just be another January Effect or is this something else?
The January effect is a calendar-related phenomenon in the financial market when prices increase in the month of January. Knowing that this phenomenon exists allows investors to buy stock for lower prices before January and sell them after their value increases. One way to explain this trend is that individual investors, who are income tax-sensitive sell stocks for tax reasons at year end and reinvest after the first of the year. Another cause is the payment of year end bonuses in January. Some of this bonus money is used to purchase stocks, driving up prices.
One could say that the increase this year in January was due to the January Effect or to other factors. Some of the indicators during the month of January support increased equity prices and some did not. They include but are not limited to:
- An 8.5 percent unemployment rate, the lowest in almost three years.
- It is possible that investors had such low expectations for the economy that it was easy for things to turn out better than expected.
- Concerns in Greece and Portugal regarding there economic stability related to their government bonds and their ability to pay them.
- Consumer confidence fell to 61.1 in January, down from 64.8 in December. Economists had expected 68.
- There are signs that the housing market continues to struggle.
- Online brokerage firms have reported that buyers outpaced sellers among its clients for the first 14 trading days of the year, Jan. 3 to Jan. 23.
- Companies like Radio Shack and Best Buy have reported lower than expected earnings based on soft demand.
As one can clearly see, the indicators for the month of January are mixed yet we had the best January in 15 years. Is it the January Effect or is this an indicator of what's to come in 2012. Only time will tell. What do you think?