[Beginner's Guide] The Stock Market's Brief Rise: The 'January Effect'... What About This Year?

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[Asia Economy Reporter Kwon Jaehee] Dear Joorini investors, the new year has dawned.

Last year, not only our stock market but also the global stock markets performed really poorly.

Still, the expectation for the 'January Effect', which is said to record the highest rate of increase during the year, remains strong.

Let's look back on last year's stock market and see whether the January Effect is possible this year in light of that.

What is the January Effect?

The phenomenon where stock price increases in January are relatively higher compared to other months is referred to as the January Effect.

Without a clear reason, when the year changes, a vague expectation that stock prices will rise causes money to flood into the stock market, pushing prices up.

The term "January Effect" is known to have first appeared in 1942 in an article written by American investor Sidney Wachtel in the journal "Chicago Business."

In fact, in the U.S., since 1970, the three major indices (Dow Jones 30, S&P 500, Nasdaq) tend to have the highest returns in January and February.

Some say that at the start of the new year, new policy announcements lead to rises in related beneficiary stocks,

and institutional investors sell stocks at year-end to close the year, then create new portfolios in the new year, increasing institutional buying in January and pushing the market up.

How was the stock market in 2022?

On December 29, the last trading day of 2022, the KOSPI index closed at 2236.40 points.

This is about a 25% drop compared to the beginning of the year, and it is the first time since 2018 in four years that the KOSPI index closed lower at year-end.

Compared to major overseas countries, the domestic market's decline was relatively large.

The annual KOSPI fluctuation rate ranked 25th out of 27 countries, including the G20 and major Asian countries.

This is two ranks lower than in 2021 (23rd).

The market capitalization of the KOSPI market was 1767 trillion won as of the closing day, shrinking by 19.8% (436 trillion won) compared to the end of last year.

By investor type, institutional and foreign investors maintained a 'net selling' position, while individual investors maintained a 'net buying' position.

Institutional investors net sold 11 trillion won, and foreigners net sold 6.8 trillion won.

On the other hand, individuals net bought 16.6 trillion won.

The KOSDAQ market also closed at 679.29 points in 2022,

which marks a decline for the first time in three years since 2019.

Can we expect the 'January Effect' in 2023?

Since last year's market closed leaving investors disappointed, expectations for the January Effect are high.

However, the securities industry generally holds the view that there is no 'January Effect' based on vague expectations.

This is because Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), continues his tightening stance, and corporate earnings outlooks are also bleak.

Lee Jae-sun, a researcher at Hyundai Motor Securities, analyzed, "For investor sentiment to improve, the macroeconomic environment must improve, but high-intensity tightening is still ongoing, so it will not be easy."

Kim Young-hwan, a researcher at NH Investment & Securities, explained, "Just as the fundamental reason for the absence of a year-end Santa rally was the Fed, it is difficult to expect issues like an economic rebound in 2023, so it is hard to expect the January Effect."

Poor corporate earnings in the fourth quarter last year and a bleak corporate business sentiment index for the first quarter of this year are also reasons why the January Effect is hard to expect.

According to financial information provider FnGuide, the combined operating profit of 248 listed companies with securities firm earnings estimates for the fourth quarter decreased from 38.6655 trillion won in November last year to 36.7721 trillion won in December last year.

The business sentiment index for the first quarter of next year, as perceived by companies, is also gloomy.

The Korea Chamber of Commerce and Industry surveyed 2,254 manufacturing companies nationwide on the 2023 first quarter Business Survey Index (BSI), which was 74, down 7 points from the fourth quarter last year.

This is even similar to the level in the first quarter of last year (75), when the economic outlook was poor due to the impact of COVID-19.

At times like this, what should be focused on rather than fluctuating investor sentiment is earnings stability.

If you build a portfolio with such stocks, you may be able to achieve relatively good earnings even in a difficult market.

The securities industry advised focusing on sectors expected to improve profitability and have high sales growth despite poor fourth-quarter earnings last year.

Representative sectors include Healthcare (Samsung Biologics, Celltrion), Construction (Samsung Engineering, Hyundai Construction), and Display (LG Display, Duksan Neolux, Seoul Semiconductor).

Despite high inflation this year, the Hotel & Leisure and IT Hardware sectors showed both high sales growth rates and profitability.

These sectors are also expected to see significant increases in operating profit next year.

Dear Joorini investors, you worked hard in a really difficult market last year.

We hope good days come to the stock market in the new year,

and we wish that with [Joorini Guide], you gain confidence in investing and have more days of smiling in your investments.

Happy New Year!

This article is from [Joorini Guide], published weekly by Asia Economy. We explain stock-related financial news and difficult economic stories in an easy and friendly way so that stock beginners can understand. Click subscribe to receive articles for free.

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