Nothing but a January Effect

Jan 5, 2013

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
The recent fiscal cliff deal had a strong positive impact on markets. On the first trading day of the year, markets around the world experienced large gains on the back of the fiscal cliff deal. However, a closer look at this fiscal cliff deal does not give us much to cheer about.

The fiscal cliff deal agreed in the US defers the main decisions on spending cuts for another two months. At that point, the US debt ceiling will need to be lifted too. Further to that, the US government has to agree a new budget later that month. If what we just had was a fiscal cliff, what we'll have in two months will be a fiscal catastrophe. The stakes are even bigger.

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If all we did was kick the can down road, why are the markets cheering so much? There is another phenomenon in financial markets known as the January effect. The January effect is the observation that stock markets tend to underperform in December and then outperform the following January.

This means that markets are likely to fall towards the end of the year, and then recover these losses at the start of the New Year. The main reason for this is that many investors sell off their stock holdings at the end of the year for tax reasons, and then re-invest at the start of the New Year.

The market movements over the last two weeks are very consistent with a January effect. In the last week of December, global stock markets fell most days of the week and ended up much lower. At the beginning of January, these losses were reversed as the market shot upwards.

The January effect is not something that sustains upward market movements for very long. In fact, since the fiscal cliff was only postponed rather than solved, markets are sure to be on edge once again as the next deadline approaches in two months time.

While some commentators will see the recent stock market gains as reason to be optimistic, my view is that we have only delayed this crisis by another two months. Instead, what we've seen in the last couple of weeks is nothing but a January effect.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Nothing but a January Effect"

sudhir chandra yadav

Jan 6, 2013

Yes, I agree with your view that this is only a january

Like (1)
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