Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 142

Do 'January' results foretell the full year for equities?

In Part 2 of our ‘January effect’ examination, we respond to several readers who asked whether the poor January 2016 in the share market foretells a bad result for the whole year, or is the market more likely to rebound because it has been over-sold?

Put another way, based on what happens in January, is there either:

  • a ‘momentum’ effect, where January returns tend to be continued for the rest of the year, or
  • a ‘reversion’ effect, where January returns tend to be the opposite for the rest of year?

History favours a small momentum effect

Historically, positive returns in January have turned into positive full year returns most of the time (80% of years in the US and 72% in Australia). Conversely, low returns in January have turned into low full year returns most of the time. Since 1900, the statistical correlation between January returns and full year returns have been 0.40 in the US market and 0.46 in the Australian market. These moderate positive correlations may indicate the presence of a momentum effect in both markets.

But there is a little sleight of hand going on here. Since the January returns are included in the full year returns, the correlations are artificially high because they double-count January. High return years end up being high partly because of the good start in January (in Part 1, we observed that, on average, January has been the best month in both the US and Australian markets for more than a century).

The problem is that after January’s result is known at the end of January, unless you are Marty McFly or Doctor Who, you can’t go back in time to sell or under-weight shares at the start of the year if January was bad, or over-weight if January was good, in order to get the full year return. All that is important now is the future - the likely return for the rest of the year from the start of February to the end of December.

Since 1900, the correlation between January returns and the ‘rest of year’ returns have been 0.19 in the US market and 0.23 in Australia. These are much lower than the full year results but they indicate a possible weak momentum effect.

If such a momentum effect did persist, we could make excess returns by over-weighting shares for the rest of the year after a good January and under-weighting after a bad January. This sounds like another market anomaly or inefficiency (another ‘free lunch’!).

As statistical correlation numbers are often misleading, ambiguous and say nothing about underlying causes let’s look at the actual results.

Rest of year returns after January – US market

The first pair of charts show that the ‘rest of year’ returns in the US have been higher in years when January was up, compared to years when January was down.

The 10% median rest of year return in years when January was up is significantly higher than the 0.3% median rest of year return in years when January was down.

Also the right chart above shows that in years when January was up, the rest of the year was up 75% of the time, but in years when January was down, the rest of the year was up just 51% of the time. This means the incidence of losses over the rest of the year were more frequent in years that started off with a down January.

The problem with exploiting the January effect

Unfortunately, just like the original ‘January effect’ we analysed in Part 1, what appears to be another ‘free lunch’ also disappears on closer inspection. The above charts look at the period from 1900 to 2015 as a whole, but the next chart takes the 10% median ‘rest of year’ return difference between ‘up January’ years and ‘down January’ years and breaks it into decades.

Positive blue bars indicate decades when the rest of year returns following positive Januaries exceeded rest of year returns following negative Januaries (momentum effect). Red negative bars indicate the opposite - a reversion effect - when the rest of year returns in negative January years were higher than rest of year returns in positive January years.

The decade by decade results show that this effect has largely disappeared in the past couple of decades. The bar on the far right shows the difference since 1990 to be much smaller than the 10% difference over the whole period.

Rest of year returns after January – Australian market

The first pair of charts for Australia show that the rest of year returns have been a little higher in years when January was up, compared to years when January was down, but the difference has not been statistically significant (unlike in the US were the difference has been much larger).

Also the right chart shows that in years when January was up, the rest of the year was up 72% of the time, but in years when January was down, the rest of the year was up 69% of the time. Here too there has been no significant difference in Australia, unlike the US market where the difference has been large.

Reasons for difference between US and Australia

Rather than just look at the numbers, I always try to understand the fundamental drivers at work.

January is a big month in the US: 4th quarter and full calendar year-end profit results, payment of the 4th quarter dividend, and often the announcement of annual dividend increases after the full year results. Much price-changing news for investors to digest and act upon. In contrast, January is quiet in Australia – the long summer break (whereas the US has its long summer break mid-year), no profit reports (most Australian companies have June year-end), December half-year reports are released in February here, not January) and few dividend payments, and rarely if ever any dividend announcements. It is no wonder the results for January compared to the rest of the year have been quite different in Australia and the US markets.

The next chart shows the difference in Australia in rest of year returns between ‘up January’ years and ‘down January’ years broken down into decades.

This shows that the effect has been much patchier and inconsistent than in the US, and is mainly the result of two isolated decades – the 1950s and 1980s. I would not base a strategy on such an effect in the past 100+ years.

The bar on the far right shows the difference since 1990 to be insignificant in recent decades, as in the US market.

Conclusion

In the US stock market there was a relatively strong momentum effect for ‘rest of year’ returns following January’s return. It persisted for many decades in the US but appears to have largely disappeared in recent decades. The reasons for its disappearance are probably the same as for the disappearance of the original ‘January effect’ – widespread access to low cost computing, brokerage rates, futures markets and ETFs, that enabled investors to capitalise on the advantage until it was ‘arbitraged away’.

The Australian market had no such ‘rest of year’ momentum effect. If it existed at all in Australia it has disappeared since the 1990s, as in the US.

It is a reminder to always try to get behind the numbers and understand the fundamental causes and effects before committing investors’ funds to what seems to be a seemingly high correlation suggesting an opportunity for outperformance.

 

Ashley Owen (BA, LLB, LLM, Grad. Dip. App. Fin, CFA) has been an active investor since the mid-1980s, a senior executive of major global banking & finance groups, and currently advises UHNW investors and advisory groups in Australia and Asia. This article is general information and does not consider the personal circumstances of any individual.

 

  •   11 February 2016
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Read this before you go all in on US equities

Is FOMO overruling investment basics?

Feel the fear and buy anyway

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Latest from Morningstar

Does an American retirement rule work for Australians?

The 4% rule has survived decades of scrutiny, but Australia's retirement system changes the equation in ways most overlook. Before accepting or rejecting this rule of thumb, it pays to understand what really drives retirement outcomes.

Shares

Glencore lands on the ASX. Should BHP and Rio shareholders switch?

A coal-heavy miner with governance concerns isn't the obvious choice for investors. Yet, Glencore's ASX listing may offer something BHP and Rio can't. The challenge is working out whether the opportunity outweighs the risks.

Why does the system treat capital gains and losses differently?

Investors are often told not to let tax policy drive their investment decisions. Yet, under the new CGT rules, portfolio construction, volatility and even how assets are owned may have an outsized impact on their final outcome.

Economy

Three common sense reforms that Australia needs

What do frozen bank accounts, mortgage traps and pension penalties have in common? They're all symptoms of a system that makes life much harder. Yet the obvious solutions seem to have escaped the attention of Canberra.

Shares

The hidden cost of government debt for investors

Some of the important effects of rising public debt never make the headlines. Research shows the immediate effects may already be unfolding, influencing corporate behaviour in ways that many investors would never suspect.

Investment strategies

When do fundamentals matter?

Is fundamental investing losing its grip on markets? Investors continue to search for valuation-based explanations for every price move, but the dominant force behind short-term returns may be something else altogether.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.