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Does the “January effect” signal bad times for the stock market?

Will January’s share price performance set the tone for the rest of the year ahead?

There’s a famous saying on Wall Street: “as goes January, so goes the year,” and this adage has more to it than just folk wisdom. When the benchmark S&P 500 has gained in the month of January, it has gone on to close the year higher 86% of the time (according to figures compiled by LPL Research).

So a fall in January 2022 for the US S&P 500 of 5.3% does not bode well for the US stock market this year, or for that matter, the Aussie market.

But we need to be a little bit careful about automatically applying “US experience” to the Australian situation. They actually have a “January effect” caused by the calendar – tax loss selling for their fiscal year ending in December, followed by buying in January as positions are re-initiated.

Secondly, the correlation between the Australian and US markets is not as strong as some imagine, and does wax and wane.

This year, the markets were quite correlated, with the benchmark S&P/ASX 200 losing 6.4% in January. In some areas, we did even worse, with our information technology sector being belted and giving up 18.4%. This compares to losses on Wall Street in the same sector of only 6.9% and the NASDAQ index (which also includes biotech and other growth companies) of 8.9%.

The table below shows the performances in January of the 11 industry sectors on the ASX, together with their respective market weights.

Source: nabtrade


Apart from the belted IT sector, other big losers in January were the health care, real estate and somewhat surprisingly, the consumer staples sectors. The latter is usually considered to be a “defensive” sector and includes companies such as Woolworths and Coles.

The largest sector by market capitalisation, financials, which has a weight of 27.8% in the S&P/ASX 200, gave up 6.5%. Winners included the resources sectors of materials and energy.

Following the “unification” of BHP (which sees the combination of two separately listed companies – one in Australia and the other in the UK – into one listed entity in Australia), its weighting in the S&P/ASX 200 increased to 11.3%. This has also led to an increase in the materials sector to 24.4%, and the gap between it and the largest sector, financials, narrower than at any time in the last 20 years. Further, the market is the most concentrated it has been, with the ‘top 10’ stocks accounting for 46.6% of the whole market.

But what of “as goes January, so goes the year”? Bulls will point to “dovish” statements by the Reserve Bank Governor, Dr Philip Lowe. On Tuesday, he told the markets that the RBA is prepared to be “patient” when it comes to the question of raising interest rates. He concluded:


“The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target. Ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates. As the Board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. While inflation has picked up, it is too early to conclude that it is sustainably within the target band. There are uncertainties about how persistent the pick-up in inflation will be as supply-side problems are resolved. Wages growth also remains modest and it is likely to be some time yet before aggregate wages growth is at a rate consistent with inflation being sustainably at target. The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”


Bulls will also be hoping for a solid company reporting season, which kicks off in earnest next week. This is the time when companies update the market on how they fared during the last six months, and importantly, provide guidance on how they expect to fare in the next six months.

Apart from the forward-looking statements and assessments of the business environment, key things to look out for include permanent increases in the cost base arising from Covid, supply chain disruptions or labour pressures. Overall, it should be a pretty positive reporting season of higher profits and higher dividends, with resource companies again leading the way.

And with the economy recovering from omicron and world economic growth firmly in an upcycle, this should be good for business activity, profits and ultimately, share prices.

History shows that markets trend, and despite the pullback in January, the long term “bull” trend is very much in place. The “trend is your friend” puts the odds in favour of saying that the market will be higher at the end of the year than it is today.

At least as Australia is concerned, my sense is that this January will be one of the 14% when “as January goes, so does the market” proves to be incorrect.



Paul Rickard is the cofounder of the Switzer Report. All prices and analysis at 03 February 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.

About the Author
Paul Rickard , Switzer Group

Paul Rickard is a co-founder of the Switzer Report. Paul has more than 30 years’ experience in financial services and banking, including 20 years with the Commonwealth Bank Group in senior leadership roles. Paul was the founding Managing Director and CEO of CommSec, and was named Australian ‘Stockbroker of the Year’ in 2005. In 2011, Paul teamed up with Peter Switzer and Maureen Jordan to launch the Switzer Report, a newsletter and website for share market investors. A regular commentator in the media, investment advisor and company director, he is also a Non-Executive Director of Tyro Payments Ltd and PEXA Group Limited.