The January Effect
02/07/2014 12:01 am EST
MoneyShow's Jim Jubak points out that many of the key economic numbers for January are being seasonally adjusted and he explains why this can be confusing for investors.
You've all heard of the January effect and that's what we should be watching for the week ahead. I know that it's past January—we're into February, but let's think about January as kind of a microcosm for the whole beginning of the year. The normal January effect we talk about is a tendency for stocks to go up in early January. Actually, in the beginning of December, as the selling of tax losses turns into the buying of things that have tumbled, but there's also another January effect that's related to the end of the year and the way that it makes all the economic data really, really uncertain. Uncertainty doesn't matter a whole lot, if you're not at a historic high, but when you are in the markets, and they've already priced in some sort of projection, any uncertainty about the data can be profoundly unsettling, and that's what I think we're seeing now. So what happens in January? Well, in the United States, you get seasonal corrections—that all the data has to be adjusted for Christmas, the holiday shopping period. That means you get different employment patterns. You get different shopping patterns. All that is supposed to go into the numbers to make the numbers comparable, but one-year is not exactly the same as another. Things happen earlier, things happen later. Seasonal adjustment infuses a huge amount of uncertainty into it, so that when you get jobs numbers or initial claims numbers, as we are getting for January, in the early part of February, it's very hard to figure out exactly what these numbers mean, because they're not really comparable to what we had for the month before and we don't know how much was pulled from what direction by these adjustments, and that's just the United States.
Of course, in China, you have the problem of the moving Lunar New Year. Since it's a Lunar New Year, it's not always on January 1, like the New Year's in the United States. It depends on where we are in the lunar cycle, so that, some years it comes earlier in February, some years later in February. Sometimes, as in this year, at the very end of January, and depending on where it falls, it means you get the big bumps that happen in terms of inventory build-up and cash flows at different times of the year. This year, for example, when we're comparing a 2014 January, which has a Lunar New Year that started on the 31st, with 2013, which had a Lunar New Year that started around the middle of February, it throws all the data off. You've got those things going on.
You've got the same problems in Europe because of seasonal adjustments. You've got weather, of course, in all this, but the real major thing that's going on right now is that all this data for January is very hard to interpret, so you're getting things like, oh well, the manufacturing numbers from the purchasing managers' index for January were down. Oh, but the service sector is up. What do you make of that? The market really doesn't know, not because the market is confused or stupid, but because the data is confusing. That's where we are and it usually takes until sometime in March, before we get all of this noise out of the system and we can tell what the economy's really doing, and that, I think, is what the stock market at these levels needs to see. Data they can figure out and trust.
This is Jim Jubak for the MoneyShow.com video network.