Stock market: what does the January effect mean for FTSE 100 share prices and investors?

January sets the tone for the rest of the year for the stock market. So should investors be worried about the poor start to 2016?

We are not even two weeks into this New Year and yet already 2016 has been a trying time for British investors.

Since the start of the year, worries about China's slowing economy, weakening currency and crashing stock markets (plus continued weakness in the price of oil, metals and other commodities) have caused global stock markets to head sharply south.

The FTSE 100 index is already down by more than 300 points since 31 December. 

So the old adage of "As goes January, so goes the year" may have investors concerned that 2016 will be a year to forget.

Setting the tone

In years gone by, January's returns often set the tone for the entire year, with positive returns in January often a sign of market gains for the year as a whole. Likewise, negative returns for January can be a precursor of yearly falls to come.

New research from investment manager Fidelity has crunched the numbers of just what the 'January effect' has meant for investors.  

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Winning starts often lead to positive years

According to Fidelity's latest analysis, a positive start to a year has led to further rises for the London market for the remainder of the year almost 80% of the time  since the creation of the FTSE 100 in 1984.

The UK's main market index has risen in the first month of the year in 19 of the past 32 years and, in all but four of these calendar years, the UK benchmark has gone on to record a further gain between February and December:

Tom Stevenson, investment director for personal investing at Fidelity International said: "While the January Effect may not have come off last year, it is hard to argue against the statistics which show that a positive January has led to further rises four out of five times during the past 32 years.

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A losing January can still produce a positive year

The good news for investors is that according to Fidelity, even when the FTSE 100 gets off to a poor start in January, it has still managed to turn it around more than 50% of the time.

The next table lists the 13 years since 1984 when the London market fell in January. As you can see, on eight occasions the FTSE still ended up gaining over the year:

Tom Stevenson of Fidelity added: "As far as short-term buy signals go, the January Effect seems to have a reasonably reliable hit rate. However, as 2015 has shown, such adages should not be solely 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."

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