Monday, April 7, 2014

Financial Comment - First Quarter Effect in Stocks

First Quarter Effect in Stocks

Many analysts like to follow what is called the “January Effect” on stocks, which states that there exists a strong correlation between how the month of January goes with the stock market, so goes the rest of the year.  Analysis has shown that this relationship is much stronger when there is a positive return in January than when there is a negative return – when there are positive returns in January there tend to be positive returns for the whole year; while negative returns in January don’t necessarily indicate negative yearly returns. In a recent article on seekingalpha.com, Tiger Technologies ventured to find whether there is a link between the first quarter returns and the year returns, i.e., whether there is a “First Quarter Effect”. The company’s conclusions confirmed the existence of a First Quarter Effect which turns out to be quite similar to a “January Effect”.

Tiger Technologies took the quarterly and annual returns of the S&P 500 index over the period 1952-2013 and ran a correlation analysis of first quarter returns and the returns for the rest of the year. They found that the first quarter had the highest correlation among all quarters to the performance of the sum of the remaining three quarters. They looked deeper and found that 39% of the studied years had negative first quarter returns, but out of those 23 years, only 10 years were negative as well. First quarter returns were positive in 36 out of 59 years, and 33 years (92% of 36) were also positive. In other words, a positive first quarter has 92% of the time led to a positive year, but a negative first quarter does not tell much about what the year’s return will be.

Tiger Technologies used this analysis to forecast the S&P 500 index result for 2014. In Q1/2014, the S&P 500 grew by 1.7%. The analysis showed that a first quarter growth of 1%-2% has led to a positive year 100% of the time (although there were only three such years between 1952-2013). This sounds quite good in terms of S&P 500 chances to score a positive return in 2014. At the same time, Tiger Technologies notes that the data, which was used for this analysis, is limited, and that, as usual, past performance is no guarantee of future returns.

By: Ukrainian Credit Union Limited

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