Enjoying the Ride: The January Effect
By Scott Brown Managing Principle
Happy New Year to you and yours! I trust this finds everyone off to a positive start to 2022. Hopefully you had a wonderful holiday with family and friends and you feel reinvigorated to get back to work, school or whatever your routine typically involves.
For many, January is commonly a time for resolutions, goal setting, a renewed focus, and a time for reflection and hopefully appreciation for our blessings like health, happiness, loved ones, accomplishments and more.
As investors, it can be a time for the so-called “January Effect.” What is the January Effect you ask? The January effect is a hypothesis that there is a seasonal anomaly in the financial market where securities’ prices increase in the month of January more than in any other month. In fact, the average gain during the month of January in the S&P 500 is 1.8 percent vs. 0.7 percent on average for the other 11 months.
This calendar effect in theory creates an opportunity for investors to buy stocks for lower prices before January and sell them after their value increases. As with all calendar effects, if true, it would suggest that the market is not efficient, as market efficiency would suggest that this effect should disappear, according to Investopedia.
In fact, an ex-director from the Vanguard Group, Burton Malkiel, the author of “A Random Walk Down Wall Street,” has criticized the January Effect, stating that such seasonal anomalies don’t provide investors with any reliable opportunities. He also suggests that the January Effect is so small that the transaction costs needed to exploit it essentially make it unprofitable. He may or may not be correct; however, the days of indexing costs aren’t very prohibitive.
Some potential explanations for the January Effect include but are certainly not limited to: selling that typically occurs in the month of December related to tax-loss harvesting (selling underperforming stocks to offset gains with the hope of minimizing tax liabilities); and portfolio rebalancing and performance drag created by year-end contributions that may stay in cash while waiting for the new year to get invested.
In addition, some investors believe that January is the best month to begin an investment program or perhaps they are following through on a New Year’s resolution to begin investing for their future.
Finally, some investors who earn year-end bonuses that are typically paid out in January opt to invest some or all of their bonus money in January just as small business owners whose profits were promising during the previous year may opt to invest some of their earnings in January as well.
With the January Effect in focus, I have to say I find it a bit depressing that for most consumers the January Effect is the opposite as our spending typically rises in December to pay for gifts and holiday travel and then our balance sheets drop in January as we pay off credit card debt. But I digress.
Just remember, as you detox your body this month don’t forget to also detox you balance sheet so that you can continue to Enjoy the Ride!
The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security, including the possible loss of principal. Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments.