Investors seek “alpha”.
Alpha is the measure of investment performance over a benchmark.
If your portfolio earned 11% and the benchmark (e.g. S&P 500, MSCI world, PSE All-Shares Index) earned 10%, your portfolio has an alpha of +1. If your portfolio return is 9% and the benchmark return is 10%, your portfolio has an alpha of -1.
If your portfolio has a negative alpha, it might have been better (and cheaper) if you just invested in a portfolio that tracks the benchmark.
This is probably why a very popular investment website is named Seeking Alpha.
In the years following the financial crisis of 2008-2009, due mostly to quantitative easing (or QE… most people know QE as “bailout”), stock prices became highly correlated. This made it difficult for investors to gain alpha through stock picking. Since the US Federal Reserve announced the end of the QE programme, stocks are starting to become less correlated. Analysts expect stock correlation to drop even more and stock volatility to increase in 2015. Stock pickers (the good and the lucky) may be picking up alpha as well.
Read the report on CNBC.
The January effect pertains to the stock rally usually observed during the first month of the year. These are some of the reasons attributed to this:
- Investors sell off their stocks in December to create losses to offset some of their gains for the year. They do this to reduce taxes. Investors start buying again in January which leads to a rally.
- During the holidays, people are busy with holiday-related activities such as shopping, partying, vacationing, etc. People also use most of their available funds for holiday spending. In January, people may be more focused on the market. Those who experienced spending “fatigue” may use their available funds to invest instead when January comes.
- People who “promise” to themselves that they will start investing will likely do so at the start of the year. After all, “New Year’s resolutions” are executed in January. This is the time when people start doing responsible activities such as exercising, dieting, taking up a new hobby, organizing stuff… and investing.
- Investors tend to be optimistic at the start of the year. This optimism leads to a rally.
Start watching the markets, and you might just catch a rally.