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Holiday Cheer and a Fresh Start for Investors

Written by: Donna Ann Peck 491 views

At this time of year, both individual and professional investors look over their portfolios. After a turbulent 2008, and up-and-down 2009, investors are looking for a fresh start in 2010.

If you want to be productive with your investments, you are probably following the discussion of the January Effect in the financial news.

This market anomaly is well documented. To cite evidence supporting the January Effect, from 1979 to 2006 the small stock index rose an average of 2.5 percent during the month of January, but rose 4.7 percent from mid-December to mid-January.

In a Money Morning article, Larry Spears writes that the January Effect is one of the most recognized, and reliable, stock market phenomenon. It could offer quick gains for small-cap investors.  “Stocks do better in January than in any other month— and small stocks do better than large stocks, with the bulk of the gain realized from the final trading day of December through the middle of the following month,” says Spears.

In terms of the stock market’s general performance, “the small-stock portion gains in the first trading days of January have accounted for the sector’s total advance for the entire year,” he says.

Another market anomaly that occurs at this time of year, the so-called Santa Claus rally, is a psychological phenomenon: the market’s reaction to holiday cheer. To cite evidence, a large company index was tracked for fifty-five years beginning in 1950 and revealed from December 27 to January 2 an average gain of 1.5 percent.

If the company’s stock rises as the new trading year begins, it will rise steadily though the year. In other words, as the first few days go, so goes the year.

Market adviser George Putnam notes the trends but sticks to the fundamentals. In a recent Forbes article, he says, “The sharp swings in the market over the last 15 months or so may create some particularly interesting year-end opportunities this year.”  He identifies ten stocks likely to bounce in January, stating “We focus on fundamental business factors that affect the values of particular stocks.”

He also ignores artificial selling pressures. “Tax loss selling comes about when investors sell their losers to generate taxable losses to offset other gains,” he  says. Many investors have losers in their portfolios, left over from last year’s market debacle, he says, but “with the sharp rebound in the stock market since March, many investors probably have gains to offset as well.”

How should the average investor react to the January Effect and the so-called Santa Claus Rally?

Despite the hoopla in the financial press, the January effect does not occur every year and when it does, its effects are not powerful enough to make a big difference in a person’s portfolio.

Many portfolio managers tell clients not to consider it when deciding whether to buy or sell their investments. John Buckingham, chief investment officer for Al Frank Asset Management says of the January Effect, “It’s a valid situation, but in recent years we haven’t seen a big impact. I wouldn’t be buying stocks based on these anomalies.” A 22-year veteran of the stock market, Buckingham scrutinizes more than 1,000 stocks for his firm’s clients.

Buckingham tells investors looking forward to a fresh start  in 2010 “to pay attention to the valuations of the company you’re investing in.” In 2010, large-cap stocks are far more attractive to Buckingham. “We are gravitating toward those,” he says. “I don’t see a lot of value in small-cap stocks.”

The firm now offers Exchange Traded Fund (ETF) products since acquiring Innealta Portfolio Advisors. The Al Frank creed is “Don’t play the short-term trends if you have long-term money invested in stocks.”

Having a stock broker for a dad, I heard the advice he repeatedly gave his customers: Buy good companies and focus on the long term. As bells ring in the New Year, ponder this sage advice.

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