While it is possible to evidence the existence of the „year-end rally“ or the „January effect“ on the basis of historical time series, signs of a year-end rally on the DAX could usually already be noted at the end of September. In the final quarter, the DAX gained an average 3.8% as shown in our analysis of DAX monthly returns dating back to 1960.
This was originally based on the theory that, in former times (i.e. 80 years ago rather than 20 years ago), many private investors waited for the year-end closing date and then started buying again in January. What’s more, political events of major importance in the USA very often take place in January, e.g. the investiture of a new President or of Congress, or the US President’s speech to the nation.
Decades ago, seasonality strategies made sense at certain times of the year because business life really was characterised by agricultural cycles, investment cycles following presidential elections or even holiday cycles, particularly during the summer months.
However, cycles of this kind no longer exist anymore. Present-day stock market trading has also radically transformed in past decades. With seasonality strategies, investors are also subject to the „hindsight error“ familiar from psychology, i.e. the phenomenon of always knowing better in retrospect. Circumstances and reasons which negatively influenced earlier events are systematically blanked out. Despite all this, reference is still made in research and practice to studies on „market anomalies“, even if in many cases those analyses are outdated. If you collect and statistically analyse sufficient data, regularities (mostly random) will be discovered (data mining).
A look at successful investors shows that successful investing cannot be reduced to a few simple isolated economic parameters, calculations or even thumb rules. We therefore believe that discussions over „year-end rallies“ and the „January effect“ make nice story-telling but are highly-unsuitable for long-term wealth accumulation.
Current market estimate – dynamic Trump rally followed by deceleration
Hardly anywhere in the world are equity markets powering ahead as strongly as in the USA at this point in time. Of the established equity markets, the Japanese indices and the French CAC 40, for example, still lie way below their record levels of past years. The British equity market has been performing better of late, trading only a few percentage points below its high. Things also look better for the DAX, despite it being a performance index (i.e. based on the reinvestment of distributed dividends) and not a price index like the other aforementioned indices: Germany’s leading index would have to gain 16% for it to reach its record high. There are many reasons for this Transatlantic „gap“, but the main reason most likely lies in the fact that the Americans were able to quickly restore strength to their enterprises following the financial crisis, while Europe has become mired even deeper in problems in recent years. The valuation situation has been arguing for equity investments in Europe for some time now, with the majority of equity indices trading in line with their long-term averages. In America, by contrast, the major indices have been dear in historical terms for some time. Yet investors are still willing to pay a premium for better sentiment and therefore continue to give preference to US stocks over their European counterparts.
However, the strong Trump rally that culminated in rapidly rising share prices and falling bond prices, will probably be replaced now by a phase of disillusionment due to the ebbing flow of news over the new administration. The overshooting price movements of past weeks could well turn out to be a flash in the pan, particularly on the equity market, and initiate a consolidation phase. After all, there is still striking absence of concrete (and thus measurable) plans from the new government. Against this background, European markets could well catch up on the US market in the weeks ahead thanks to the support being gained by the continent’s export-strong companies from the stable demand on emerging markets and the weak euro.
We view the further development of the equity markets towards year-end in a cautiously-optimistic light. Our price target for the DAX as per 31.12.2016 remains unchanged at 11,000 points. By year-end 2017, we expect the index to have risen to 12,000 points. This corresponds to upside potential of around twelve percent versus the present level. The slight acceleration in global economic pace will cause profits of export-strong DAX companies to surge upwards, thereby creating upside price potential. Another consideration is that there are still hardly any attractive alternatives to investments in equities at the moment. The „year-end rally“ myth could therefore again prove true in 2016.