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January's Effect

By Dian Vujovich

There is no way of sugarcoating it—last year’s markets were the worst we’ve seen in decades. But, last year has been put to bed. Now it’s the first trading day of the New Year with any luck at all, 2009 will start off on the same positive foot in our markets as they have in those around the world.

Today, London’s FTSE 100 Index closed up 39.7 points, or 0.9 percent, today; Germany’s DAX ended the day 1.4 percent higher; and France’s CAC-40 gained nearly 42 points to close 1.3 percent higher, according to AP sources.

If our US markets share the same enthusiasm—and keep it up in the coming days and weeks—investor confidence would certainly get a much-needed positive boost. And who knows, maybe even the January Effect will get some ink in February.

Just to refresh, for the past 20 years, January has been a good performance month for smaller stocks. Reason being, the prices of these shares have often been beaten up because of year-end tax-related selling. Additionally, new money also enters the market during this month.

As for larger stocks, like those found in the S&P 500 or the DJIA, well, the January Effect may sound like a good notion but the numbers don’t show it.

That said, those who believe in this small-stock strategy are probably sitting with fingers-crossed. After all, the January Effect last year was a bust—-for stocks of all sizes.

Legg Mason’s Month-End Commentary, January 2008, read: ” What started out to be the worst January on record turned out to be only the fifth worst since 1950….”

At the end of January, that report listed the returns on the various stocks indices as follows:
NASDAQ, down 9.86 percent; S&P 500, down 6 percent; DJIA, off 4.48 percent; Russell 1000, down 6 percent; Russell 2000, down 6.82 percent; Russell 1000 Growth, off 7.8 percent; Russell 1000 Value, down 4.01 percent; and the Dow Jones Wilshire 5000, off 6.05 percent.

My hope? That by the end of January 2009, there will be more positive market performance news to report than negative.

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