The "January Effect" is not at play so far this time. The hypothesis is that investors buy back stocks in January, leading to gains in benchmarks, after they had sold their holdings in December, largely due to tax reasons. Nobel Laureate Robert Shiller had said: “Investors are much more optimistic and bid up the prices of stocks at the start of the new year… It is likely that all of these combine to produce higher January stock returns.”
Historical data does show that January has been a decent performer, if not the best, since 1980. The trend of January’s upsurge was mostly prevalent in 1985-1999. Since 2000, however, the January Effect has been hit-or-miss.
So far it has not shown up as we cross the midway mark of the month. The Dow, S&P 500 and Nasdaq are down 2.8%, 3.2% and 3.5%, respectively, in January 2015. In 2014 too, the myth was proved wrong as the blue-chip index had plunged 5.3%, and the S&P 500 and Nasdaq had ended Jan 2014 with declines of 3.6% and 1.7%.
Small caps are said to be the outperformers in January; the effect being most evident in them. But this has also failed to show this time, as the Russell 2000 also is down 4.2%.
The Wall Street adage “as goes January, so does the market” is not necessarily true, therefore, in recent years. On the other hand, the outlook for 2015 is mostly bullish and is expected to shed January’s gloom, much like last year. Investors can look beyond the failure of the January Effect so far, and pick top Zacks Rank stocks for profit.
Historical Performance
According to CNBC, since 1980 January has an average return of 0.92%, ranking fourth. As for the best percent return, January leads with an average gain of 14.6%. The following chart shows January’s performance since 1980.
|
Month |
Average Return % |
% Positive Trades |
Median Return % |
|
January |
0.92 |
61 |
2.18 |
|
February |
0.09 |
57 |
0.94 |
|
March |
0.81 |
65 |
1.38 |
|
April |
1.36 |
68 |
1.03 |
|
May |
0.8 |
60 |
1.24 |
|
June |
0.06 |
48 |
-0.03 |
|
July |
0.61 |
54 |
0.25 |
|
August |
0.12 |
60 |
0.72 |
|
September |
-0.62 |
48 |
-0.49 |
|
October |
1 |
68 |
1.7 |
|
November |
1.26 |
68 |
2.26 |
|
December |
1.69 |
73 |
1.4 |
Source:CNBC
3 Stocks Likely to Capture January Effect Gains
Some believe that the January Effect has become a shadow of what it used to be. Many suggest approaching January cautiously and not blindly believing in the myth. When there are issues like crude oil prices dropping to a five-year low and speculations about what the central bank will do with interest rates, trusting myths are not prudent investment moves. Rather, investors should focus on economic growth prospects and the current earnings season.
For investors looking to enjoy the January gains, we have picked 3 top-ranked stocks. These stocks have enjoyed significant gains so far this year, obviously beating the markets, and are likely to continue the rally. They also have favorable growth estimates and decent forward price to earnings ratio (PE).
CoreSite Realty Corporation (COR) provides data center products and interconnection services. It serves telecommunications carriers, content and media entertainment providers, cloud providers, enterprise customers, financial and educational institutions, and government agencies.
CoreSite Realty currently carries a Zacks Rank #2 (Buy) and has returned 10.9% so far in January. It has a PE of 17.57x. Yearly growth expectation now stands at 13.7%, ahead of 8.3% for the industry.
Cohen & Steers Inc. (CNS) is a leading manager of income-oriented equity portfolios and specializes in common and preferred stocks of REITs and utilities, as well as other preferred securities.
Cohen & Steers currently carries a Zacks Rank #2 and has returned 9.5% so far in January. It has a PE of 21.49x. Yearly growth expectation now stands at 19.6%, ahead of 13% for the industry.
Vonage Holdings Corporation (VG) is a leading provider of digital phone services. They offer feature-rich and cost-effective communication services that offer users an experience similar to traditional telephone services.
Vonage Holdings currently carries a Zacks Rank #1 (Strong Buy) and has returned 10.2% so far in January. It has a PE of 21.95x. Yearly growth expectation now stands at 78.9%, ahead of 12.4% for the industry.
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