FTSE continues to rise as 2017 begins but will the 'January Effect' last the year?

3 January 2017

Investors will be interested to hear that the close of 2016 heralded a brand new high for the FTSE 100 of  7,142.83 points – far beyond the sub-5,500 levels seen in February.

This momentum has continued into 2017, with the UK’s top index hitting 7,205 on the morning of 3 January:  a new year, a new high.

The index’s good fortune has been put down to strong performance from mining companies, the recent rise in oil prices, renewed confidence in the American economy, and overseas earnings from British companies - which the falling pound has made more profitable.

 

The question that many private investors have in these situations is if they should take advantage of such market highs and take a profit while the going’s good? Timing the market in this way is very tricky, however, and research from investment firm Fidelity International published today may also convince you to stick rather than twist.

It’s found that since 1984, which is when the FTSE 100 was created, whenever the index has done well in January, which it has done 19 times, the index has made a further gain come December, in all but four years.

This means the ‘January Effect’ has had a success rate of 79% (within the 19 cases).

 

Tom Stevenson, investment director for personal investing at Fidelity, says: “There is an old adage that states ‘as goes January, so goes the year’. While the January Effect may not have come off last year, it is hard to argue against the statistics.”

But he warns: “However, such adages should not be relied upon when making investment decisions. Instead, investors should focus on sound investment principles such as staying invested through the cycle, saving regularly and being well diversified across asset classes and geographies.

 

“Even when the FTSE 100 has got off to a poor start in January, there’s a silver lining for investors. In the 14 years in which the FTSE 100 has had a negative first month, the market reversed that trend on nine occasions, going on to end the year at a higher level, as shown by the results for 2016. In five years, the down trend continued for the rest of the year.”

 

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