We in the finance major learn about something called
the “January Effect”, where an investor can theoretically earn outsized returns
by buying securities in January versus other months. Why is that?
There is a matching phenomenon that there is a big sell off of
securities in the previous December because investors are eager to take the tax
advantage associated capital losses on investments that are performing
poorly. The intuition makes sense but in
the past decade, the market has been down in as many Januaries as it has been
up. In fact, the average month increase
when the DJIA was up was a little over two percent (2006, 2007, 2011, 2012,
2013). On the other five Januaries,
where it went down, it fell by over four percent (2005, 2008, 2009, 2010, 2014). The January Effect seems about a legitimate
as the Leading
Lipstick Indicator: the intuition is there and “60% of the time it works every
time”, as Brian Fantana says. Yet we
would be remiss to make buy and sell decisions citing it as a rationale.
As I
write, the DJIA has fallen around five percent this year, the worst since 2009…when
we (along with the rest of the world) were in a bona fide recession. What could be the cause of this? Ironically, though not surprisingly, one of the
stabilizers that helped cancel the recession is contributing to the poor
performance now. This is, of course,
quantitative easing which has been propping up the stock market as much as the
economy. Now that it is scaling back,
down to 65 billion dollars this month, the chicanery of the animal spirits is a
little more dramatic and a little more visible than usual. People have been calling it a “taper tantrum”.
Let’s hope that when Janet Yellen takes the
helm of the Federal Reserve on Monday she’ll have the volition to successfully wean
capital markets off the easy money they have become accustomed to.
The
other major contributing factor to this month’s poor performance comes from the
developing world. According to Reuters
investors have pulled nine billion dollars out of emerging market funds and
bonds in the past week. Yikes. It seems
like a lot of the volatility in has been due to weakening exchange rates
(Turkey and Argentina, notably), but from reading the news, I get the impression
that it largely reactionary as investors see their peers selling off their
assets. Hat tip to the animal
spirits.
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| From Yahoo Fiance, cue sad music. |
