The stock market’s performance in January depends on how the year ahead is expected to unfold, but it’s institutional investors that ultimately drive the January Effect
Stock markets, on average, exhibit considerable strength in the month of January, based on academic studies, giving rise to the well-known “January Effect.”
Every January, portfolio managers make investment decisions with the aim to increase the probability they will earn a large bonus at year end, depending on whether, and by how much, they outperform their benchmarks. To do so, they invest in securities that are riskier than their benchmark at the beginning of the year .
To shed light into this conjecture, I constructed an economic indicator consisting of variables that could be a proxy for indicators that institutional investors would consider before making investments, such as the yield curve and corporate profit expectations.
At the same time, the yield curve spread was minus 0.22 at the end of September . As of the end of December it is minus 0.82, having turned more negatively sloped over the past quarter.
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