This is the first week of January, and there has not been much chatter about the January Effect, at least not that I can tell. It is always a topic bandied about at this time of the year. So, what exactly am I writing about?
The January Effect is …
The tendency of the stock market to rise between December 31 and the end of the first week in January. The January Effect occurs because many investors choose to sell some of their stock right before the end of the year in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st, these same investors quickly reinvest their money in the market.
Maybe, it is less talked about this year because the market dropped precipitously this week and last, which raises the question, why? Me thinks the answer lies in the fact that when the market began its rapid and steep decline, many investors simply got out of the way. Advice I gave, by the way, just last week. They understood the overzealous selling was unwarranted, so they waited until yesterday, and, well, today to put the January Effect into play.
And the reason they felt compelled to get in the market starting yesterday is the ADP employment report that just came out for December.
- Companies added more workers than forecast in December, indicating the U.S. job market was sustaining strength as 2014 drew to a close, according to a private report based on payrolls. The 241,000 increase in employment was the biggest since June and followed a 227,000 November gain.
Fellow traders and investors, there is no indicator regarding the US economy more important than employment and the market understands this. If folks are working, then folks are spending. Investors understand that if this employment trend continues (upward), then 2015 will be yet another good year for the market.
- “Companies are consistently adding jobs,” said Thomas Costerg, an economist at Standard Chartered Bank in New York, who projected a 240,000 gain. “The U.S. job market continues to chug along. Consumer spending will accelerate from 2014.”
Yup! Consumer spending will accelerate in 2015, and that, my friends, is all the market needs to keep on buying. Until the upward economic trend ceases, expect the market to go up.
Now, just when you thought oil could not help in the upward economic trend any more than it has already, you know, giving the consumer more money to spend, well, think again.
- Another report today showed the trade deficit narrowed more than forecast in November as U.S. petroleum imports sank to the lowest level in more than five years. The gap shrank 7.7% to $39 billion, the smallest since December 2013.
Yes, oil is helping with our trade balance, but, more importantly, as a nation, the US is exporting more goods and importing less goods, a major change from the consumption habits that have characterized the USA for decades. This in itself will help the US GDP grow in the fourth quarter and right into 2015.
So, is the January Effect in play today? Maybe, but don’t discount the obvious as a reason the market is coming back from its earlier decline this month. Yup, it could just be investors are buying the dip, a move that has been in play, well, for over five years now, and as long as the economy keeps on improving, this should not change.
Trade in the day; invest in your life …
