January 2008. What a month. At its low point early in the morning of January 22, the FTSE-100 was down almost 19 per cent since the start of the month. A tremendous rally then kicked in. By month-end, shares were down "just" nine per cent for the entire month.
There is no debate that January's late-month advance was a powerful bounce-back. But the fact still remains that the full month's decline was the third-worst start to the year in almost 100 years.
Now that January has ended, the old expression "As January goes, so goes the year" comes to mind. Is this ancient bit of stock market wisdom worth the time we spend on it?
As far as 2008 is concerned, the answer is yes. There is a definite statistical correlation between a weak January price trend and a weak stock market performance during the rest of the year.
There were 11 occasions in the last 90 years when the UK stock market declined in January by -3.1 per cent or more. History teaches that prices fell in the next 11 months seven times versus just four advances. In statistical terms, it was a 36 per cent success rate.
Two of those four gains were tiny. Shares advanced by just +0.3 per cent in February to December 2000 after an eight per cent drop in January. They gained just +0.1 per cent in the aftermath of a big January decline in 1952.
These statistics make an important point. Big January declines in January do not guarantee further losses in the rest of the year but they certainly increase the odds that a decline will occur.
As the graph reveals, the profit odds for the rest of the year improves in lock-step with January improvements. There were nine other years when shares slipped in January by a smaller amount, within a range of -0.1 per cent to -3.1 per cent. Prices rose in the next 11 months five times or 56 per cent of the time.
If prices decline in January by less than -0.1 per cent or rise by any amount, the likelihood of a gain in the next 11 months increases to 73 per cent. This figure is slightly stronger than it appears to be. The relationship did not work well in the 1920s. Since 1930, shares in this group rose in 44 out of 57 years, a 77 per cent success rate.
As far as 2008 is concerned, the big drop that we saw in January suggests that investors adopt a note of caution for the rest of the year.