Seasonal Factors Could Signal Profitable 1995
People naturally grow hopeful about their investments as one year winds down and a new one approaches. This time around, there actually may be some theories to justify such optimism.
A couple of interesting seasonal factors are converging in 1995 that could make the year a profitable one for stock-fund investors. Such factors don’t work perfectly, of course, but their track records over time have been impressive--and fun to follow.
If history repeats, expect the market to rise for the following reasons:
* The last digit of 1995 is a 5.
Goofy as it sounds, the stock market has shown a strong tendency to rally during the middle of each decade--years such as 1975 and 1985. In fact, the Dow Jones industrial average has advanced in every mid-decade year from 1885 on, reports Marshal Acuff, investment strategist for Smith Barney in New York.
Results since the early part of this century have been especially impressive. Large stocks, as represented by the Standard & Poor’s 500 index, returned 31% or more in 1935, 1945, 1955, 1975 and 1985.
They gained only 12% in 1965, but small stocks surged 42% that year, reports Ibbotson Associates of Chicago. Small companies advanced at least 20% in each of those other decade midpoints starting in 1935.
If you had to pick a single year in each decade in which to invest, those ending with 5 would be best, followed by years ending in 8. The toughest times were those years ending in 7.
* The Presidential election cycle turns favorable.
Stocks don’t fare so well in the two years following a Presidential election, but they often sizzle in the two years preceding a vote.
The explanation: “Each administration usually does everything in its power to juice up the economy so that voters are in a positive mood at election time,” argues Yale Hirsch of the Hirsch Organization in Old Tappan, N.J.
Usually, that involves White House attempts to boost federal spending to ensure the that economy is on an upswing, Acuff says.
There might also be a psychological letdown among the electorate following a Presidential vote when people realize promises won’t be fulfilled, says John Wyzkiewicz, an Ibbotson consultant. Conversely, during the two years leading up to Presidential balloting, investors get excited again about the prospect of a new administration and change, he reasons.
In fact, years that immediately precede an election year have been the best of all. Starting in 1943, stocks have advanced at least 5% in every such period--a string of 13 in a row, according to Ibbotson data. What’s more, 11 of the 13 have been double-digit gainers.
* Small stocks turn up at year end.
Shares of smaller, thinly traded companies tend to rally after Christmas and continue climbing several weeks into the new year--the “January effect.” This doesn’t imply that 1995 will be strong overall, but it does suggest that small stocks will start the year on a sound footing.
The most common rationale for the January effect is that tax-related selling in November and December acts to depress prices temporarily.
But there may be other explanations, such as a rise in confidence around New Year’s Day that makes people more comfortable investing in smaller companies. Another possibility: Obscure firms may release more financial data around the start of the year and thus generate more enthusiasm among investors.
“There are problems with each of these theories, but clearly the effect has some statistical substance to it,” says Lance James, portfolio manager of Babson Enterprise II, a small-stock fund headquartered in Kansas City, Mo.
A January effect is also seen in other countries, which adds to the mystique of the phenomenon since tax laws differ around the world, says Wyzkiewicz.
Small U.S. companies historically have returned about 6.9% in January, by far their best month, according to Ibbotson data. That compares with January gains of about 1.6% for the largest U.S. corporations.
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Currently, smaller companies are enjoying improved sales and profitability, yet their share valuations remain modest.
“We’re still confident they will outperform the larger stocks next year,” James says.
To the above three seasonal factors can be added several other anomalies--from bad months for the stock market (September and October, for example) to bad days (Monday). You might want to adjust your holdings a bit in anticipation of some of the more dominant themes--such as the market’s tendency to rise in the year preceding an election year.
But it wouldn’t be wise to make drastic shifts in your allocations, as doing so could be a dangerous exercise in market timing.
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Women are more conservative investors than men and would likely cut their losses faster, suggests a recent survey of 300 fund shareholders by Aetna Mutual Funds of Hartford, Conn.
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“Women appear to be less likely to stick with a long-term investment if it’s losing money,” says Judith Bramson, an Aetna vice president.
The survey indicated that women are more bearish about the short-term growth prospects of their fund holdings and are less likely to own foreign investments. But they also are more likely to seek help from a professional adviser.
Among men, 58% said they gleaned financial information from magazines and newspapers, but only 32% of women did.
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