In the investment world, certainty is a rare commodity. Exactly because investing is an exercise in probabilities, we rarely know what’s going to happen. That’s not to suggest that investors are clueless about the future; indeed we have impressions, feelings, thoughts, concerns and ideas about what may happen, but do we ever really know what’s going to happen? Rarely.
This is one reason I think Jim Cramer is so popular – he is selling certainty in an uncertain world. Now, I would never follow any of his investment recommendations, but he certainly exudes confidence and reason about the stocks he recommends. All the “boo-ya” antics aside, I find him rather entertaining, and I will admit that he has raised awareness among individual investors about the important issues surrounding the investment process. For more about my feelings regarding those who offer “free” investment advice please refer to this blog.
Because the investment process is encircled by so much uncertainty, investors will often grasp at something that appears to be solid. The “January Effect” is one example of these “somethings.” Simply put, the January Effect is the notion that the market usually rises in the month of January and that a good performance by the market in January bodes well for the entire year. Over the last 60 years, when January logged a positive performance, the market was higher for the full year about 90% of the time. When the market fell in January, the full year showed a negative return about 55% of the time.
Another similar phenomenon is the “Super Bowl Effect.” More often than not, the stock market rises in the years when a team from the old National Football League (now the NFC) wins the Super Bowl. Hence, equity investors may have another reason to cheer for the New Orleans Saints this year. There are other “somethings” out there like the “Presidential Year Effect,” the “Halloween Indicator,” the “Mark Twain” effect and so forth. All of these observations are simple attempts to bring more certainty into the stock market. All of these things are also totally absurd, fun perhaps, but absurd.
They are classic examples of “correlation without causation.” The crowing of the rooster may be highly correlated with the rising sun, but the bird’s cry does not cause the sun to rise. Every year ice cream sales and accidental drownings show a remarkable correlation. Does eating ice cream cause drowning? Clearly not, but they both tend to rise during the summer months.
Just because two effects appear to be correlated does not mean they are related. Now, I enjoy chatting about the “January Effect” as much as the next person. In fact, I find all of these observations and anomalies quite entertaining, but I do not use them at all in my investment decision making process. For that I stick to the things I believe truly matter for the stock market – interest rates, corporate earnings, supply/demand factors, cash levels and sentiment.
And, despite the market’s action in January, I remain encouraged about the outlook for stocks. This is based on my belief that most of the above factors are supportive and are likely to remain mostly supportive of higher stock prices into the future.

Source: Investopedia
