The 'January effect' for stock markets is fading: Goldman

LONDON (Reuters) - U.S. and UK equity indexes holding near record highs, a brighter earnings outlook and rising forecasts for economic growth have all spurred talk of the “January effect,” or the notion that the first month of the year is always bullish for stocks.

A trader works on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell in New York, U.S., January 5, 2017. REUTERS/Lucas Jackson

Data suggests otherwise. A Goldman Sachs analysis of returns since 1999 noted that the January effect has faded compared to a longer history going back to 1974.

2016 was a particularly rough January for U.S. and European equity markets which suffered one of their worst starts to a calendar year on record.

Since 1999 the data shows average performance for January has been -0.5 percent against +0.2 percent for all months, relegating the “January effect” to the status of market folklore.

On average, the STOXX 600 .STOXX has risen 1.5 percent in January since 1974, compared with an average of 0.7 percent for all months, thought those numbers are flattered by a 27 percent surge in January 1975.

However, the bank’s analysis does find evidence that reallocations across regions are more common in January, a trend that has picked up over the past decade.

The S&P 500 index is more likely to underperform the STOXX 600 in January, when the American index’s valuations look stretched at the end of the year, the Goldman’s research found.

This could be because investors are more likely to shift their regional allocation into markets trading at a discount when starting new mandates at the beginning of the year.

The S&P 500 trades at just above 17 times forward earnings, close to its highest since 2004, according to Thomson Reuters data. The STOXX 600 trades at about 15 times, putting the differential between the two near its widest in seven years.

While the January effect is no longer as strong as it was, the other market adage -- “sell in May and go away” -- still held some truth particularly in Europe where stocks are generally weaker over the summer, Goldman wrote.

Reporting by Helen Reid, Editing by Vikram Subhedar