You many have heard people speak about the "January Effect," but what does it actually mean? In short, the January Effect is a concept suggesting that the first month of the year tends to experience a seasonal increase in stock prices. Some even take the anomaly a step further, suggesting that a positive January means a positive calendar year.
With January around the corner, does the “January Effect” concept hold water? Let’s investigate.
Where Did the Idea of the January Effect Originate?
According to most accounts, the January Effect originated around 1942 when an investment banker, Sidney Wachtel, first noticed it. In the beginning, the January Effect was merely an observation that stocks tended to do well in the first month of the year, but over time it evolved into other observations, such as the notion that small-cap would outperform large cap in January.
Perhaps the most substantive evidence of the January Effect came from a study performed by investment firm Salomon Smith Barney, which found that from 1972 to 2002 the stocks of the Russell 2000 index (small cap) outperformed stocks in the Russell 1000 (large cap stocks) by 0.82% in the month of January (if that does not seem like that big of a deal, it’s because it isn’t).
For some time, analysts had a variety of hypotheses about why January was strong month for stocks. Some saw it as a rally following declines in December, which some believed was caused by investors engaging in year-end tax loss selling and then perhaps waiting for the 30-day wash sale period to end. Another explanation was that investors were year-end cash bonuses to buy stocks, or that investors were following through on New Year’s resolutions to start an investment plan (not a bad New Year’s resolution, by the way).1
Whatever the cause, the January Effect became popularized over the years, and chances are that investors may hear the phrase in the coming weeks as the end of the year approaches.
But here’s what else you need to know about it.
Does the January Effect Actually Work?
New studies show that the January Effect may have lost some – or all – of its luster. Goldman Sachs conducted an analysis of returns starting in 1999 and found that the January effect has faded when compared to a longer history going back to 1974.
Though the January effect “worked” in 2017 with the S&P 500 rising from 2,275 to 2,329 (+2.37%), the previous year (2016) “failed” given the US and European equity markets suffered one of their worst starts to a calendar year on record.
All in all, Goldman’s data since 1999 shows the average performance for January as -0.5% versus +0.2% for all months, which more or less debunks the "January Effect" and shifts it to the category of “market anomalies to ignore”.2
Reviewing Your Portfolio in the New Year
For long-term investors, the January Effect is not a good enough reason to make adjustments to your asset allocation and holdings. But your portfolio could still potentially use some adjusting – the New Year will likely bring with it new investment themes, new opportunities, and the possibility of exploring some new strategies and managers that align with your long-term objectives and needs.
WrapManager can take a look at your current portfolio and provide you with ideas to adjust your allocation for the new year. Find out how by contacting us at 1-800-541-7774 or by sending an email to wealth@wrapmanger.com.
Source:
1. Investopedia
2. CNBC
