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There goes January – Everyone needs sounder reasons to invest than a stockmarket adage

11/02/2014

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

This January was a bad month for investors and, as an old stockmarket adage has it, “As goes January, so goes the year”. Now, regular visitors to The Value Perspective will be aware we are not instinctive followers of old stockmarket adages but, then again, neither is it in our nature to dismiss potential nuggets of investment wisdom out of hand so let’s investigate the idea more closely.

In 62 of the last 85 years, as it happens, the full-year performance of the US stockmarket – as represented by the S&P 500 index – has moved in the same direction as the January that kicked that year off. Well, OK, but 85 data points each offering only two possible outcomes does not throw up the most statistically significant conclusions, so let’s play around with the numbers a little.

Are there occasions, perhaps, when the market has only been pausing for breath? The table below shows the 12 times the S&P 500 fell in January after it had risen more than 15% in the previous year – as it did (and then some) in 2013. As you can see, the average whole-year return over those 12 occasions is a negative number, which would appear to be a victory for old stockmarket wisdom.

5th February 2014

But hang on a moment – we already know January is a negative month so what we are in fact interested in is not what happened over the whole year but the whole year excluding January. And if, as the table says, January was down by an average of 4% and the whole years was down by an average of just 3.6%, then the period from 1 February to 31 December actually averaged a slight positive.

Clearly things are more complicated than a phrase such as “As goes January, so goes the year” can encapsulate but, still, let’s keep at it and, this time, consider a shorter time period. What tends to happens in February after the S&P 500 has fallen in January? As you can see from the table below, on average, a ‘down’ January is followed by a ‘down’ February.

5th February 2014

Once again, however, the picture is much less straightforward because, as you can also see, there are more Februaries where the S&P 500 is actually up than when it is down. In other words, the simple average masks a particularly complicated situation where you have markets mostly going up but a smaller number of very large market falls that skew the overall average downwards.

Albert Einstein is often quoted as saying one should simplify things as much as possible but no further yet that advice is all too often ignored by the media and other market watchers. Investment is a complicated subject and, by using simple ideas such as averages, people risk oversimplifying matters – in the process losing the nuance and colour that is so important.

As we said at the start, the above analysis all comes down to 85 data points based on an either/or outcome and there would need to be a great deal more observations before anything of statistical significance emerges. In the meantime, you could allow your investment decisions to be guided by stockmarket adages or do as The Value Perspective does and be driven by valuation.

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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