As the year draws closer to an end, some investors may start to adjust their portfolio, particularly for those whose portfolio have not done well for the year. But what does the month of December and January mean for the returns in your portfolio?
In the U.S, the ‘January Effect’ suggests that there will generally be a drop in price in December before stock prices increase during the month of January the following year. According to Investopedia, one possible explanation is that investors are selling off securities that had incurred a loss for the year in order to offset taxes on their gains and income. This is known as tax-loss harvesting.
Will It Be Applicable To Singapore?
We were curious to find out if the January effect was applicable to Singapore, given that our country does not have any tax on capital gain, or loss that can be used to offset tax. We took a look at the results from the historical data of SPDR STI ETF, an ETF that could be seen as the proxy to the market.
|Year||Price Change in January||Price Change in December||Returns in January||Returns in December||January Effect?|
|2015 – 2016||-9.31%||0.68%||-11.30%||1.05%||REVERSE|
|2014 – 2015||0.00%||1.80%||0.37%||0.65%||NO|
|2013 – 2014||-4.04%||0.62%||-4.40%||0.34%||REVERSE|
|2012 – 2013||2.15%||2.88%||3.39%||2.85%||NO|
|2011 – 2012||9.16%||-3.18%||6.83%||-0.98%||YES|
|2010 – 2011||-2.71%||1.23%||-1.49%||1.88%||REVERSE|
|2009 – 2010||-5.72%||5.32%||-5.82%||5.59%||REVERSE|
|2008 – 2009||-5.32%||3.95%||-2.98%||3.57%||REVERSE|
If we were to look at the figures from 2008 to 2016, we see that in Singapore, there is not only no evidence of the January effect, but in fact, a reversal can be observed.
Out of the 8 periods analysed, 5 periods had demonstrated the opposite of the January effect. What this means is that in December, prices increase before subsquently showing a reversal in January.
On a side note, we need to put forward some disclaimers; the data for the analysis is based strictly on the SPDR STI ETF which is used to serve as a proxy for the Singapore market. Furthermore, historical results are not reflective of future results.
What Does This Mean For Me?
Based on the analysis shown above, if you were to see a positive gain in prices in December, there is a 62.5% probability that prices will fall the following month. It is also interesting to note that while 7 out of 8 Decembers have shown to be positive months to invest, only 3 out of 8 Januarys are able to produce positive results.
This does not mean that you should sell your stocks when it comes to January because depending on the stocks you hold, performance may differ accordingly. Also transaction cost, once incurred, may offset any savings you hope to achieve by avoiding months that are likely to show poor returns.
All in all, what we have see here is that the ‘January Effect’ is not prominent in the Singapore market.
How can you choose winning stocks in Singapore? Join us on 16 November in our next 90-minute series: Guide To Choosing Winning Stocks, as we discuss some of the key elements to look at when choosing stocks to invest in.