Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

One aspect to investing we saw evidence for in the final quarter of 2020 was that there’s a danger in dwelling too much in the past. Despite continuing downbeat news from services companies and the economy as a whole, stock markets pressed firmly ahead. The driver behind these gains was the prospect of closed areas of the global economy reopening in 2021 following the rollout of Covid-19 vaccines, leading to a period of growth synchronised across nations.

There is a problem with that though. Overlooking the possibility of a difficult path to recovery in the meantime has left stock markets looking vulnerable to periods of self doubt. That’s what seems to have afflicted stocks late over the past week, after America’s central bank signalled its policies of maintaining interest rates at near-zero and buying financial assets to support the economy would continue for some time yet.

You might have thought the Fed’s statement would have been greeted more positively by markets – especially in view of the IMF’s latest forecast that the US economy will grow by around 5% in 2021 – but it appeared to be viewed more as affirmation there’s an economic mountain still to climb1. US government bonds and the dollar rose as stocks fell2.  

Meanwhile, disquiet rumbled through the technology sector after mixed earnings reports from Facebook and Tesla. A downbeat outlook for 2021 overshadowed news of strong growth in revenues in the fourth quarter at Facebook; while Tesla undershot profit expectations despite selling more cars.

Add to that day traders on the Reddit social media website in America apparently working in concert to drive up shares previously sold down by hedge funds – thereby driving large losses at several hedge funds – and last week had a very strange feel to it.

The VIX Index – which measures how volatile professional investors expect America’s S&P 500 Index to be over the next 30 days – spiked at one point to its highest levels since just prior to the US presidential election last November3.   

So is this latest bout of volatility a sign of things to come, or more easily explained away by short-term investors taking profits after an otherwise positive start to the year for markets?

Apart from the surfacing of leftfield events around a handful of formerly unfashionable companies in the US like GameStop, there were no great surprises for investors last week. As expected, the Fed stood behind its current policy, seeing no reason to start reducing its asset purchases until the US recovery has become fully fledged.

The valuations of some US technology companies remained elevated, as they have been over the past year, and continued to make some kind of sense only if one expects exceptional longer term secular growth to be achieved. Tesla says it expects deliveries of its cars to grow by 50% per annum in future years4.

The past week has highlighted though that there is currently scope for disappointment over the short term. Some would argue that the US stock market, in particular, is already priced for vaccination success and a perfect recovery outcome.

It’s important to remember though that the outlook for this year as a whole will have been little changed by the events of the past week. A further, short period of negative economic growth seems almost certain given continuing lockdowns, however, growth could bounce back very sharply in the second half of the year amid a release of pent-up consumer demand and as government stimulus programmes get to work. The IMF this week upgraded its forecast for global growth in 2021 to 5.5%, from the 5.2% rate it had predicted last October5.

At all times it makes sense to maintain a balanced portfolio of investments able to take the rough with the smooth and come out on top over the longer term. A good way to do this is via a multi-asset fund of funds offering a broad exposure to equities, bonds and cash, perhaps other types of assets too. The Fidelity Select 50 Balanced Fund, now in its third year of existence, is designed this way.  

Funds chosen for inclusion are mostly taken from Fidelity’s Select 50 list of favourite funds. Overarching this, the fund’s manager, Ayesha Akbar, constantly monitors and, if necessary, adjusts the portfolio’s makeup according to her assessment of economic conditions and the prevailing opportunities.

Guides as to how stock markets might move in future based on past patterns are notoriously unreliable. Each year we check to see how “sell in May, go away, come back St. Leger’s Day” stacks up and are invariably disappointed with the results. However, according to research carried out this year by Fidelity, at least one attempt at forecasting does exhibit some historical consistency.

The “January effect” means different things to different people. Past claims for January include that it delivers better-than-average returns compared to other months of the year, or that it marks a period during which smaller company shares tend to outperform blue chips. Perhaps the most intriguing claim of all though is the ages-old adage “as goes January, so goes the year”.

If this were true, we would be able to determine whether or not it would be worth staying invested between February and December each year based on how well or poorly markets had performed in January.

The basic numbers for the FTSE 100 Index, at least, look encouraging. Since its foundation in 1984, the Index has risen on 20 out of 37 occasions in January, so just over half the time. Intriguingly, it has only failed to deliver a positive return between February and December in a year starting with a positive January on three occasions.  

There are, of course caveats. One is that 37 years is the best part of an investing lifetime. Over the shorter term, the results of this analysis are less impressive. Since 2000, the FTSE 100 has risen only seven times in January and on two of these occasions – in 2001 and 2015 – returns between February and December were significantly negative.

In addition, and more importantly, any strategy that only invested after a positive January would have missed out on some pretty spectacular gains in the past. Since 2000, the Index has risen eight times between February and December after falling in January and very impressively so in 2003, 2009 and 2016⁶.

Five year performance

As at 31 Dec

2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
FTSE 100 19.1 12.0 -8.7 17.3 -11.6

Past performance is not a reliable indicator of future returns

Source: Refinitiv, as at 31.12.20, total returns in GBP.


1,5 IMF, 20.01.21
2 Bloomberg and US Department of the Treasury, 29.01.21
3 Cboe, 28.01.21
4 Tesla, Inc., 27.01.21
6 Fidelity International, 05.01.21

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. The Fidelity Select 50 Balanced Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Fidelity Select 50 Balanced Fund investment policy means it invests mainly in units in collective investment schemes. There are just a few fixed limits for the three core elements in the fund. These are 30% to 70% for shares, 20% to 60% for bonds and 0% to 20% for cash. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered:

Volatility; Global; Active investing; Diversification; UK

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