The Weekend Edition # 24

Happy New Year 🥳

Welcome to the first issue of the Weekend Edition for 2022.

Investing this year will be different but, we will make it great!!

Thank you to all who’ve read and subscribed to the newsletter this week. Last week we crossed 1800 views!! 🎉

Since we’re all still in the holiday spirit, I will keep it brief this week:

Here’s what I cover:

• Market Recap - FOMC, PPI, Retail Data, Housing Data, Curve Flattening

• Macro of the Week - The January Effect

• The Week Ahead - A few economic indicators and earnings season is around the corner.

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - Dec 27 - Dec 31, 2021

Not a bad way to end the year with the S&P hitting an all time high at 4808. All four broad market indices closed the week green, confirming the uptrend and the Santa Rally. We did close the last two days in red but we’re looking for a reversal of that with the January Effect coming on. [More on that below]

US Sectors for the week show Real Estate come out on top, followed by Utilities, Materials and Consumer Staples. What does that tell you? The market is still playing it defensive.

The Yield Curve still remains flat. Very modest gains on the long end of the curve compared to gains on the short end of the curve, signalling the market is still in a state of flux.

Other Economic Data for the Week

Last week we had a few economic indicator. But, one that was interesting - jobless claim data. We have Jobs Friday next week where we will see more information on how Jobs are moving but for last week we saw that the labor market is tightening and we may see further wage increases on the horizon.

Macro of the Week - The January Effect

The January Effect is an interesting phenomenon first noticed by the investment banker Sidney Wachtel in 1942. Since then, there have been numerous studies that confirm the January Effect.

What Happens?

It’s simple: stock returns increase in the first two weeks of January. Remember that, first two weeks.

Another interesting study done in 1983 [by Keum and Reinganum] shows that the January Effect is more pronounced in small cap stocks than in large cap stocks.

Why Does It Happen?

There have been a number of convincing arguments for the January Effect but according to Professor Aswath Damodaran, none hold up to serious scrutiny. The basic premise is that investors sell stocks during the year-end more than they buy, driving stock prices down in December, on average. Then investors buy these stocks back in January, resulting in higher returns. Two possible reasons:

• Tax loss selling: Many investors sell their loss-making stocks to take advantage of lower taxes.

• Institutional Activity: There is evidence to suggest that institutional buying decreases at year end. However, while many cite this as a reason for the January Effect, studies show that institutional selling also decreases to a certain extent towards year end.

Will We See a January Effect in 2022?

Quite possibly. The January Effect has held for a very long time and I don’t see why it won’t this year. We hit 4800 on the S&P but closed down for two days in a row. It was the same with Small Caps and the Nasdaq. But, the market is still in an uptrend and with that momentum we probably will see some positive returns. Although to what extent, I don’t know.

Actual Findings

Small Caps vs. Large Caps

This is a comparison of how many times the SML (S&P 600 Small Cap Index) has outperformed the SPX (S&P 500), with data starting from 2002 to 2021.

So the theory of Small Caps doing better than Large Caps holds. 

S&P Outperforming

According to Yardeni research, January is a good month for the S&P but, not the best month. Nevertheless, the January Effect seems to hold.

The Week Ahead

Major Economic Data

• Tue, Jan 04 - Manufacturing Data & JOLTs Job Openings

• Wed, Jan 05 - Fed Minutes

• Fri, Jan 07 - Jobs Friday - Payroll Data

Earnings 

A brief set of earnings coming up this week before, we begin another earnings season with the Banks the week after - starting with JPM on Jan 14.

Closing Thoughts

Anyone who’s been following me for a while will know by now that I don’t make big calls. And the sole reason for that is that the market has an uncanny way of throwing you a curveball every once in a while.

The only way to manage challenging situations is by being armed with the right knowledge and information. The more you know, the better you will be at trading or investing. What I’ve come to learn is that being in the markets is not a weekend sport. But, rather a test of patience, resilience and lots of learning.

There will always be times that we are wrong. Even Buffett has been wrong on many, many occasions. But the question is at the end of the day, how did he do overall? Whether you’re a trader or an investor, this is not about looking at quick wins. It’s about taking the long view of your P&L. Maybe not as long as Buffett but you get the idea.

In keeping with these thoughts, I plan to bring you more content this year to help you learn what’s going on in the markets, and to help you generate ideas for parking some of your money.

Here’s wishing you a happy weekend and safe investing… and a strong year ahead.

Sincerely yours,

Ayesha Tariq, CFA

@ayeshatariq

There’s always a story behind the numbers

None of the above is Investment Advice and all views are personal. I may or may not have positions in any of the stocks mentioned. I have no affiliation with any of the companies that are mentioned.