Banking on the January effect

The MSCI All Country World Index, which measures the aggregate return of all major global stock markets, is already up over one percent on the week, as of last night’s close and almost 2.5% on the month.

The tendency of stock markets to rally strongly at the beginning of the year is known as the “January Effect”, since investors (being generally an optimistic bunch) are typically bullish with the new year.

However an associated aspect of this that is perhaps less well-known is sometimes called the “January Barometer”.

What does this mean?

Historically, when January has been positive, the stock market has subsequently delivered almost double its long-term average return for the year.

To be specific, since 1929 the US stock market (for example) has delivered a positive return for the year on 80% of the occasions when it was positive in January, with an average return of approximately 13% for the year, which is almost double the long-term annual average return of just 7% from stocks.

Hence the age-old stock market adage – “as goes January, so goes the year”. Although of course, this is not a guarantee!

Earnings season begins

Coming back to the present, another feature of January each year however, is the start of the latest earnings season.

Earnings kicked off in the US this week with some of the biggest banks on Wall Street – including the likes of JP Morgan, Bank of America and Citibank - reporting a slew of exceptionally strong profits. This bodes well for continued economic growth.

Ultimately, all economies need a healthy and profitable banking sector, since it is the commercial banks (rather than central banks via QE) that create the vast majority of the money in circulation by making new loans to borrowers.

In Summary;

These two factors (The January Barometer and strong bank earnings) should be supportive of markets and economies in 2020.

© 2019 GWM