What May be Likely in January - and for All of 2013

In the typical four-year Presidential election cycle, post-election years (like 2013) are typically the worst year of the four-year cycle, averaging gains of 1.96% since 1833, according to The Almanac Investor (using the Dow index since 1886 and Cowles or other indices before that.) However, five of the last seven post-election years delivered substantial double-digit gains, so there is some hope that the trend is reversing.

Recent Post-Election Year Market Results
• 1985: +27.7%
• 1989: +27.0%
• 1993: +13.7%
• 1997: +22.6%
• 2001: -7.1%
• 2005: -0.6%
• 2009: +18.8%

Source: The Almanac Investor, using the Dow Jones Industrial Average

There is more cause for hope. Markets have historically performed best with a Democratic President and a Republican Congress. Although there is less co-operation in such a gridlocked arrangement, that may be just what the market likes to see - less action from Washington, DC, and more of a focus on business.

Turning to more immediate concerns, January is typically a great month in stock market history. January has delivered the most cumulative Dow point gains of any month, since 1950. From 1950 to 2012, January rose 44 times and fell 19 times. We saw nine straight rising Januarys from 1991 to 1999, but a split verdict since then: January has been up only six times and down seven times since Y2K dawned.

January is the #1 month for the NASDAQ index (measured since 1971) and #2 in the Russell 2000 (since 1979), but it falls to #4 as measured by the Dow and S&P 500. That's evidence of the January effect, when small stocks (like those in the Russell 2000) tend to beat big stocks (like those in the Dow index).

David Fuller's view These statistics are interesting and may influence some people. However, aside from a little new year optimism, fanned by yesterday's response to a temporary US budget agreement, the background circumstances are inevitably different every year, so I will focus on current developments and expectations.

Quantitative easing (QE) remains the big monetary policy factor and it is an overall tailwind for equities as Fullermoney has often maintained in recent years. However, markets can run ahead of events and may have done so, temporarily, with Wednesday's surge. Shallow near-term consolidations by Wall St and the other big stock markets would be positive and maintain confidence. Conversely, downward dynamics would be unsettling and could delay further strength.

Interestingly, the underperformance of most QE-driven government bond markets since June 2012, which I also mentioned yesterday, could also support equities.

Meanwhile, in what may seem counter intuitive, favourable economic news from the USA, not least regarding the Fed's 6.5% unemployment target, would probably be bearish as it would signal to Mr Bernanke that he could rein-in QE. Most people think the 6.5% figure remains out of reach for perhaps three years. That is unlikely to be more than a guess. Therefore if it happened in the second half of 2013, and I'm hypothesising rather than forecasting the unemployment figure, the good news on employment figures could represent a negative shock for the market.

I will review a number of stock market indices tomorrow.