The stock market has performed extremely well to begin 2019, with the Dow Jones Industrial Average rising almost 3% and the S&P 500 up more than 3.5% through Jan. 11. That has many market participants excited about the prospects for the full year, because a common seasonal indicator called the January effect suggests that how the market does early in the year points the way toward where it'll end up for the year as a whole. Some investors wait for the full month of January to play out, while others just look at the first week and a half or so in making their calls.
A lot of investors pay attention to the January effect as though it were a highly reliable indicator. Yet when you look back at recent history, its track record is mixed at best:
In three of the past five years, the January effect has gotten the eventual direction of the stock market wrong. One big miss happened just last year, when the S&P 500 had one of the best starts in its history, only to suffer not one but two major corrections during the remainder of the year to finish with its worst loss since the financial crisis in 2008.
After a losing year for the stock market in 2018, those who follow stocks are eager to see a rebound, and any evidence pointing toward a positive year for the market in 2019 is likely to draw attention. But you shouldn't take the January effect seriously, as even if stocks do post continued gains during the rest of the year, any link to their performance in early January will be tenuous at best.
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