So goes January, so goes the year? Well, the FTSE All-Share was down in January ….

“There is an old stock market saying that ‘so goes January, so goes the year,’ so the tentative start to 2022 may have some investors wondering quite what may be coming next, as the FTSE All-Share fell by 0.4% in January” says AJ Bell Investment Director Russ Mould. “However, it would be wrong to write off 2022 as bad job just yet. That was the index’s sixth January fall in seven years and the All-Share generated healthy capital returns in 2016, 2017, 2019 and 2021 so perhaps investors are better off focusing on the fundamental issues of profit and cash flow growth, dividend yield and earnings cover and above all valuation rather than quirks of the calendar when it comes to designing their portfolio for the year – and years – ahead.

“Statistically, January is only the third best month of the year on average anyway, as it trails February and May.

Source: Refinitiv data

“There is at least some grain of truth with this particular saying.

“Since 1964, the FTSE All-Share has risen 35 times in January (or 60% of the time), fallen 17 times (29%) and barely moved on the final six occasions.

“And once it does move higher in January then the FTSE 100 had made further gains on 24 of those 35 occasions. A January gain followed by a full-year capital gain has therefore happened 41% of the time in 58 years.

“Equally, 17 January losses have been followed by ten gains across the year and just seven declines, so, again, 2022 is far from a write-off just yet.

Source: Refinitiv data

“The FTSE All-Share has also been pretty resilient during the bout of volatility that has characterised global stock markets so far in 2022. Supported by a 1% gain across the heavyweight FTSE 100 constituents, the All-Share’s 0.4% means it has beaten all major markets bar Hong Kong, Brazil and India so far this year. 

Source: Refinitiv data. Capital returns in local currency.

“The All-Share has also comfortably outpointed the headline indices of Switzerland, Germany, Russia, Japan and Brazil over the last 12 months, when it has also easily outpaced America’s NASDAQ Composite.

Source: Refinitiv data. Capital returns in local currency.

“That relative gain compared to the previously high-flying, and tech-laden, NASDAQ may provide some clue as to why the All-Share proved so solid in January even as investors began to fret over inflation and the prospect of higher interest rates (and thus less cheap liquidity). 

“Thanks to the oils, miners and banks who populate the FTSE 100 in particular, the All-Share has a leaning toward sectors for whom inflation is not necessarily a bad thing, at least from an investment point of view, as demand for real rather than paper assets could help the commodities plays and a steeper yield curve may boost net lending margins at the financials (even if a careful eye must be kept on loan loss provisions). All three areas can be seen as value, cyclical plays on an economic recovery which may be able to offer earnings growth today.

“By contrast, technology and biotechnology barely feature in the UK’s leading indices and those long-duration. The NASDAQ is packed with this type of stock, which are growth plays that could be seen as expensive on many traditional valuation metrics after a sustained period of strong performance. They may offer the prospect of earnings growth tomorrow but if we do get an inflationary recovery then investors have no need to pay top dollar for long-term, secular growth when they can buy near-term cyclical growth for much lower multiples.

“This can be seen in the performance of the leading sector indices in the UK, both over the past month and the past year

Source: Refinitiv data.

Source: Refinitiv data. 31 January 2021 to 31 January 2022

“If oil prices stay firm and central banks struggle to rein in inflation then the UK stock market’s sector and earnings mix may mean it offers some degree of protection for investors’ cash and - who knows – it may even outperform the USA for a change.”