Will January set the tone for the new year?

Will global stock markets rise over the next few weeks? Well, if there is an uptick then it may be due to the so-called January effect. This theory suggests that the first month of the year is traditionally positive for investors, with the value of major indices increasing.

But is this actually the case? How confident can we be that our equity holdings will start 2025 in the ascendency and what factors are likely to be influential?

What is the January effect?

This concept can be traced back to the early 1940s and investment banker Sidney Wachtel’s observations about market returns. He was the first to notice that US stock prices appeared to rise more in January than during any other month of the year. Subsequent academic research backed his findings and ultimately led to the January Barometer.

What is the January Barometer?

The January Barometer refers to the fact that the S&P 500’s calendar year performance has matched the direction of January returns nearly 77% of the time*. In other words, when the index rises in January full year returns tend to be positive, and when the index falls in January full year returns tend to be negative. This has led some to believe that when it comes to stock market performance, “as goes January, so goes the year.”

Reasons for outperformance

Over the decades, plenty of reasons have been put forward to help explain why stocks may deliver outperformance in January.

• Investor decision making: One of the most common explanations is that investors sell loss-making shares to reduce capital gains tax liabilities – and then buy them back in January. This has the effect of pushing up prices.
• Portfolio management: The argument here is that fund managers use this time of the year to shake up their portfolios and ensure they’re invested in better performing stocks.
• Christmas bonuses: Anyone lucky enough to receive a bumper festive bonus may be contributing to the January effect if they choose to invest the windfall into the stock market.
• Optimism: In the same way that many of us make optimistic resolutions at this time of year, it may be the case that stock markets enjoy the same injection of enthusiasm for the coming 12 months.
• Self-fulfilling prophecy: The final argument is that markets could be rising just because investors don’t want to miss out on potential gains and start buying more shares.

So, is it fact or fiction?

This all sounds very feasible, but is it actually true? Schroders analysed 130 years of data and found the US stock market rose in January on 85 occasions. The fund group’s research went up to the end of January 2020, just before the world went into lockdown as a result of Covid-19. It also found that the first month of the year was more positive in other countries, with markets rising 78% of the time in Australia, 74% in Japan, and 71% in the UK**.

Of course, another conclusion is that the January effect doesn’t always work. There have been plenty of occasions when the markets have opened the year on a downer.

Separately, Fidelity tested the theory that January sets the tone for the rest of the year by analysing returns achieved by the FTSE 100 between its inception in 1984 and 2023. It found that of the 22 times the index rose in January, it went on to enjoy a positive return over the rest of the year on 16 occasions. However, on the 18 times that the index fell in January, it only went on to endure a negative return for the rest of the year on seven occasions***.

Conclusion

The fact is you can’t guarantee that stock markets will rise every January as history shows us that results over the years have been rather mixed. This means it’s not advisable to pin your hopes solely on short-term seasonal plays, but to invest over longer-term periods of at least five years. Global instability, political turbulence and economic factors are all likely to have an impact on stock market returns in the first few weeks of the year.

So, what are the best investment funds to consider if you want to embrace broad exposure to global stock markets at the start of 2025?

Here are five ideas to get you started.

abrdn Global Smaller Companies
Smaller companies tend to outperform their larger-cap cousins over time – and this fund from abrdn gives investors the chance to enjoy longer-term upside. Its aim is to generate growth over periods of at least five years by investing in smaller capitalisation equities from around the world. The fund’s manager, Kirsty Desson, uses the company’s proprietary screening tool, Matrix, at the start of the investment process. This tool searches for four key factors: quality; growth; momentum; and value. The investment arguments in favour are then verified with research and meetings with management teams.

Learn more about the fund in our talking factsheet series.

BlackRock Global Unconstrained Equity
This is a concentrated, high-conviction portfolio that focuses on what it deems to be extraordinary companies based in developed markets. It takes a long-term approach – which helps to block out the deafening market noise – and we believe it has a sound philosophy and strategy. According to its most recent factsheet, the fund is heavily invested in household names such as Microsoft, Novo Nordisk, Meta Platforms, Visa, and Alphabet^. Meanwhile, information technology, health care, consumer discretionary, and financials boast the most significant sector weightings^.

CT Global Focus
Our next suggestion is another concentrated, high-conviction portfolio of best ideas that invests in quality businesses that can compound over the long term. This is also a genuine global fund that has the ability to delve into emerging markets when the manager, David Dudding, spots compelling opportunities. Businesses with strong market positions, good long-term growth prospects, and high sustainable – or growing – returns on capital will be favoured. Although this fund’s quality growth bias means it may struggle when the style dips out of favour, we have plenty of faith in the manager’s long-term abilities.

Learn more about the fund in our talking factsheet series.

Rathbone Global Opportunities
James Thomson, the experienced manager of this fund, searches for innovative companies that have managed to fly under many investors’ radars. This is another active, unconstrained growth portfolio that has benefitted from following a high-conviction, contrarian strategy for many years. Nvidia, Costco, Microsoft and Walmart are among the most instantly recognisable names among the fund’s largest holdings^. While obviously global in approach, the fund has a 71% allocation to the US, 21% to Europe ex-UK, and 6.50% to the UK^.

Learn more about the fund in our talking factsheet series.

JOHCM Global Opportunities
Our final suggestion has historically been among the least volatile funds in this competitive sector, as its managers tend to adopt a more cautious approach. Its exceptional risk-adjusted performance means that it can be considered as a core global holding at the heart of an investor’s portfolio. Its stated aim is to generate long-term capital and income growth by actively managing a concentrated portfolio of globally-listed equities, including Philip Morris International, UnitedHealth, and Shell^.

*Source: Invesco, 13 February 2024
**Source: Schroders, 7 February 2020
***Source: Fidelity, 4 January 2024
^Source: fund factsheet, 30 November 2024