[Initial Insight] The Year of the Ox and the January Effect

[Asia Economy Reporter Song Hwajeong] The Year of the Ox has dawned. Perhaps energized by the ox, the stock market surged sharply from the first day of the new year, ushering in the era of the KOSPI 3000.

A bull market is likened to a bull, hence called a bull market. Conversely, a bear market is likened to a bear. There are various theories about why the stock market is expressed with bulls and bears, but the most plausible theory is that it originated from a traditional American sport that encourages bulls and bears to fight each other. The bull attacks by thrusting its horns upward from below, resembling the stock price rising from bottom to top, while the bear attacks by swiping its paws downward from above, resembling the stock price falling, which is why these terms are used.

The KOSPI plunged to around 1450 in March last year due to the impact of the novel coronavirus disease (COVID-19), but quickly recovered and has been continuously setting all-time highs since late November. It literally traced a trajectory similar to a bull thrusting its horns upward from below.

Adding to this is the January effect, which has heightened expectations for further stock price increases. The January effect refers to the phenomenon where stock prices rise more in January than in other months due to optimistic outlooks for the new year. Since 1970, the three major U.S. indices?the Dow Jones, S&P 500, and Nasdaq?have shown the highest returns in January and February. Experts say the January effect occurs because government policies are announced at the beginning of the year, optimistic economic forecasts are presented, positive stock market outlooks emerge, investor sentiment rises, and market liquidity is abundant. However, the January effect has not been clearly evident in the domestic stock market. From 2001 to last year, the KOSPI index rose in January only 12 times in 20 years.

This year, the stock market has heated up as soon as January began, further raising expectations about how far stock prices will rise. On the first day of the year, the KOSPI rose 2.47%, surpassing the 2900 mark, and on the previous day, it rose 1.57%, reaching the 2990 level, breaking its all-time high for six consecutive days. According to Daishin Securities, when the domestic stock market rises in January, the probability of a positive annual return for that year is high. Since 1981 through last year, when the KOSPI index rose in January, the probability of recording a positive annual return was 80%.

Considering the record high in 2018, it cannot be viewed with unbridled optimism. On January 29, 2018, the KOSPI surpassed 2600 intraday, setting an all-time high. However, that year, the KOSPI closed at 2041.04, about 21% lower than the peak. As the KOSPI surged to record highs, expectations for breaking the 3000 mark were high, but the sudden outbreak of the U.S.-China trade dispute wiped out all gains. It fell 17.28% compared to the previous year's closing price, marking the largest drop in 10 years since the 2008 global financial crisis.

This year, it is uncertain what unexpected variables will affect the stock market. Last year, the sudden emergence of COVID-19 caused a panic sell-off. Experts cite factors that could influence this year’s stock market, including economic stimulus measures by various countries, improved corporate earnings due to export growth, the impact of the U.S. Biden administration’s inauguration, and COVID-19. Economic stimulus measures are expected to continue positively influencing the stock market this year, but the fading momentum after policy implementation is seen as negative. Regarding COVID-19, vaccine and treatment distribution is positive, but concerns remain over prolonged duration and resurgence.

Other concerns include valuation burdens due to the steep rise and the issue of resuming short selling. The stock market cannot keep rising indefinitely. Now, when the market is soaring beyond expectations, is the time to be most cautious.

This content was produced with the assistance of AI translation services.