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Russ Koesterich, CFA
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Russ Koesterich, CFA, Managing Director, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a founding member of the Blackrock Investment Institute, delivering BlackRock's insights on global investment issues. Mr. Koesterich's service with the... More
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The Ten Trillion Dollar Gamble: The Coming Deficit Debacle and How to Invest Now: How Deficit Economics Will Change our Global Financial Climate
  • Does the Calendar Matter? The Seasonal January Effect 0 comments
    Jan 31, 2011 6:53 PM

    Taken from iSharesblog.com

    Investors will look anywhere for an edge. I have had otherwise rational and smart traders make impassioned arguments on the significance of Fibonacci sequences, sun spots, pi, and in one memorable case the Book of Revelations. Given the human propensity to find patterns everywhere, it is not surprising that people will turn to any data that seems to offer even a glimmer of an insight into financial markets. In that spirit, it is not surprising that a fair amount of ink is typically spilled this time of year in an attempt to link the calendar to market performance. Is market seasonality any more meaningful than the musings of 12th century Italian mathematicians?

    The biggest problem with seasonality studies is simply the lack of data. Even for US large caps, with only around 100 years of accurate data investors have a relatively limited number of observations from which to draw any conclusions. An even bigger challenge is that markets, unlike physical phenomenon are not stable. When too many people become aware of a market pattern it quickly evaporates as investors trade ahead of the data. Finally, and perhaps most dangerous, gathering and analyzing data has become so easy that any data set lends itself to drawing some conclusion if you look hard enough.

    Take for example the conventional lore that US equity markets do best in January. Investors can find ample evidence to support or refute the idea depending upon where and when they want to look. A cursory study of the S&P 500 can support the notion that January is the best month of the year. Since 1928 the median monthly return on the S&P 500 has been 1.54%*, nominally ahead of December and technically the best month of the year. However, this conclusion comes with several caveats.

    First, there is no statistical difference between January’s returns and July and December’s.

    Second, if you look at average returns, which will be more influenced by extreme months, rather than median returns the answer changes. Based on average returns January is actually the forth best month of the year behind July, December, and even April.

    Third, to the extent any given market statistic becomes well socialized its significance is sure to dissipate. If you look at the more recent past, January’s unique position starts to fade.

    Since the late 1980’s, the average return in January has dropped from around 1.50% (1928 to 1987) to roughly half of that level, 0.81%. This actually places January in the lower half of months. What appears to have happened is that as investors became more aware of a mild seasonal bias, they bid the market up in anticipation of the January rally, and in due course the seasonal effect shifted from January to December.  This illustrates perhaps the most important lesson in market anomalies; even for the ones that have some validity, they generally come with an expiration date.

    Sources: Bloomberg, Barrons, Reuters

    *Returns based on Bloomberg data and are net of dividends. Index returns are for illustrative purposes only and do not represent actual iShares Fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.


    Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses, which may be obtained by calling 1-800-iShares (1-800-474-2737) or by visiting
    iShares.com. Read the prospectus carefully before investing.

    Investing involves risk, including possible loss of principal.

    The iShares Funds (“Funds”) are distributed by SEI Investments Distribution Co. (“SEI”). BlackRock Fund Advisors (“BFA”) serves as the investment advisor to the Funds. The iShares Blog contributors are affiliated with BlackRock Fund Distribution Company (“BFDC”), which assists in the marketing of the Funds. BFA and BFDC are affiliates of BlackRock Institutional Trust Company, N.A. (“BlackRock”), none of which is affiliated with SEI.

    The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy.

    The information provided is not intended to be tax advice. Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations. 

    Neither BlackRock Institutional Trust Company, N.A., and its affiliates nor SEI and its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

    This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

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