Hopeton Morrison, ContributorNotwithstanding the fact that the bears have roamed all year in local equities, there is a school of thought that the month of December is a good time to move into and out of the market. Year to date the main Jamaica Stock Exchange (JSE) Index has lost almost nine per cent. This is in stark contrast to last year when the index raced upwards by a breathtaking 66.68 per cent. In fact, within the last decade, the sole time that the index declined in a year was in 1995 when there was a decline by 14.4 per cent.
Traditionally, our local market has done well in the last quarter of the year and we have even sought to argue that there could be a variance of the so-called 'December Effect' taking place locally. The fact is that trends over recent years would seem to suggest that some months are better than others for investing in the stock market. Certainly towards the end of each year there seems to be an exceptional interest in equities.
December Effect theory
The December Effect theory argues that December is the best month of all to buy and ideally, towards the end of that month is the best time to make a 'quick killing' to use our local parlance. Research has almost validated the December effect which goes even further to argue that stocks gain an average of two per cent as December draws to a close each year.
That would spell music to the ears of market timers who attempt to read a market. Within that context, the spreadsheet below is instructive.
The table analyses the main JSE index for the decade up to 2005. We look at gains or losses made for each December during that time, and for gains or losses made for each of the 10 years. The last column annualises the gains made for each December.
You will notice that annualised December gains were better in seven of the 10 years. In fact, December outperformed the entire year's gain in 1998. In 1996, the lion's share of gains made in that year was made in December. For our purposes, the most important trend would be the effect on those years where the index either made very marginal gains or lost ground. Within our high inflation environment, those years would be 1995 to 1999 and 2001; 1995 was a bad year.
But in the other five of those six years, you would have been singularly better off if you had bought into the market at the start of December and sold on the last trading day, all other things considered including the fact that your purchase would also have had to mirror the index. Even in the case of the last three years (2002-2004) which were all good years for the market, you would still have outperformed the overall index using the annualised factor if you bought at the start and sold at the end of December in 2002 and 2003.
At this time, this only offers us a speculative perspective on whether December 2005 will be a good year or not. Much research has gone into this business of timing a market. The fact that only a few persons have been able to 'beat' the market makes the point that investing is more than a gamble.
The December Effect theory is also matched by the January Effect theory. This is an anomaly explained by the fact that stocks that have performed below potential during a particular year, do tend to show exceptional performances for the first five days in January. Also fairly new in the research environment, it is another occurrence that has always confounded knowledgeable players in the market.
Hopeton Morrison is general manager of St. Thomas Cooperative Credit Union Ltd. and lecturer in the School of Business Administration at the University of Technology. Please send comments and questions to: hmorrison@stccu.com
