Will we be seeing a January effect this year?

This post has been long due and its someting different from the usual. I was written by a very good friend of mine, but since I have the attention span of a slightly stunned and confused teletubby, the whole thing slipped my mind, for that I owe him a huge apology and a create of Heineken, Sorry Tammo, this completely slipped my mind and I appreciate your effort. Plus the text you made is awesome. But now we give the stage to Tammo:

“Sell in May, then go away”, “buy at the beginning of the month” or “ride the pre-holiday rally”; a few sayings that we keep hearing about. Out of all the existing stock seasonalities and anomalies though, the January effect must be the most well known, and perhaps the most talked about seasonal pattern. This effect, also often referred to as the “turn of the year” effect, has shown its prevalence in stock markets across the world over the last century, but what exactly causes this stock pricing anomaly, and what are the odds that we will be seeing it again this year?

A little history about the January effect: it had first been observed by Wachtel in 1942. He has written about the anomaly in his journal titled “Certain observations on seasonal movements in stock prices”, where he used data from the Dow Jones Industrial Average over the period of 1927 to 1942. Later research has shown an average increase of about 3.5 % in a customized NYSE stock portfolio in January during the period of 1904 to 1974, while all other months averaged 0.5 % to 1 %.

Ever since that publication many other academics have researched the effect and written about it. Interesting fact is that, up to this point, almost 70 years later after the publication of the journal, there is not yet a general consensus as to what causes this effect. One thing is being agreed on, though, which is that this effect mostly occurs in small-cap stocks (firms with a small equity capitalization). This effect isn’t exclusive to the equity markets, however; it’s also been observed in other asset classes such as the real estate investment trusts (REITs), securitized mortgages, municipal bond closed-end funds and the corporate bond market. 

Returning to the potential main cause of this seasonal pattern, most researchers are comfortable with believing that this effect is due to fiscal reasons. Academics hypothesize that many large institutional investors would drop their bad performing stocks, and use the losses for a tax write off. This would be in line with another argument that many theorists bring forward, which is that portfolio managers at large institutional investment companies would liquidate their losing stocks in order to enhance their portfolio position at the end of the year, as this is what they are being evaluated on and compensated for accordingly, which is basically a form of window dressing. They would purchase the same stocks in the year following, which would explain the rally in these stocks. A third argument sometimes brought up is that the rally in January is caused by the release of the many of financial statements by many different companies. 

Which argument should we believe to cause this effect? Every aforementioned potential cause of the seasonal pattern has some strong counterarguments. To start with the fiscal hypothesis, the January effect has been observed in many markets across the world. How can the effect still occur in Australia when taxes are levied in June instead of in January, or on April 1^st, as in Great Britain? There aren’t even any relevant taxes levied in Japan, while the effect still occurs on the equity market there as well. Furthermore, some studies show that the rebalancing of portfolios by investment managers does not explain the January effect. And finally, if stocks rise in January due to the large number of financial statements being released, why don’t stocks appreciate by the same amount in the months of June and September, when a similar amount of financial statements is being released?

While it’s unsure what exactly causes the effect ,it may be more relevant to know if the effect will show again, in order to partake and ride the rally. Unfortunately, the effect is occurring fewer these years. This is said to be due to an increase of the global interrelation of financial markets. So, to answer the question in the title, “Will we be seeing a January effect this year?”, the chances are lower nowadays that we will this year. However, checking small cap indices such as for example the Dutch Amsterdam Small cap Index (AScX) here in the Netherlands every now and then certainly couldn’t hurt.

By Tammo Vastenburg

St. Valentine's Day - The Great Feast of Prostitution

The Valentine's Day cliches have always puzzled me. Traditionally the males of our species go out and buy some traditional token of love, the price of which is depent upon how successful the male has been in the eternal rat race of capitalism. The reasons why the males of our species have been driven to this sort of behaviour is simple, the evotionary imperative to mate comples them to to please the females of the species, so that the females might be more willing towards the males advances. To put it plainly men buy Valentine day's crap to women and the women recipricate with sexual acts. This sort of exchange of material goods for sex is on everyother day of the year known as prostitution.

The day has gotten its name from St. Valentine, a name shared by no less than 14 people who the Catholic Church saw fit to canonize. 3 of the fellows met their end on February 14th. One was priest in Rome during the persecution of Christians during the reign of Claudius II, one was a bishop of the town known today as Terni and the third one was a martyred somewhere in Northern Africa, where he was apparently spreading the word of God to an unwilling audience. So based on this information we are commemorating the day when three blokes called Valentine met their end, mostly like through some really unpleasent way, at the hands of heathens and heretics. Now what on earth does this have to do with love, friendship and prostitution?

The anwser is again rather simple. Its Capitalism at its finest. Valentine's Day is one of those holiday's that seem to excist only to provide people with a good excuse to buy stuff, much like most holiday's when all the shops are closed have no religious meaning at all to most of us(Seriously can anyone really explain to me what the Pinksterdag was all about in Holland), but the unions become hard line fundamentalist christians when it comes to days of from work. But I think the marketing machines of many industries have left several really juicy ones unexploited, the muslim Ramadan for example, its an ENTIRE MONTH.

Surely any retail business would love the opportunities of commericial exploitation offered by a month long religious holiday and it shouldn't be that difficult, when you consider the history of Islam. The great conflict between Muhammed and the Meccans had nothing to do with religion, the Meccan's were scared that Mo's teachings would ruin their profitable business opportunities provided by the pilgrims to the sacred places that were in Mecca before Islam. Thankfuly Muhammed was an exceptionally bright fellow, for a person who had religious visions(the side effects of talking to God generally include some form of madness) and his elegant solution of making Mecca the holiest place in Islam still warms the hearts and wallets of Meccans to this day.

But I digress. Overall St. Valentine's day doesn't make any sense to me and it never has for that matter. Why do we need a special day to celebrate love and friendship, beyond the points made so far, when everyday should be a celebration of our love towards one another?