There Is No January Effect

Includes: DIA, IWM, QQQ, SPY
by: Healthy Appreciation


Based on recent data, there is no January effect.

Many of the explanations for the January effect do not hold water.

The best advice is to ignore the January effect entirely.

There is no January effect. Period.

Much has been written about the January effect, what it is and what causes it, but the bottom line is that in recent history, there is no January effect.

S&P 500 Monthly Return 2009-Present

Month Return (%)
January 0.8
February 3.6
March 2.6
April -1.1
May -0.5
June 2.8
July -0.7
August 1.5
September 2.9
October 1.8
November 2.1
December 0.8

The table above shows the S&P 500 average monthly returns since 2009, the year the stock market bottomed as a result of the financial crisis. Stocks have been in a bull market ever since March of 2009; however, as can been above, there has been no outperformance in January in the intervening time. If anything, there is a February effect. (Actually, there is no February effect; February returns have just happened to be higher since 2009, which does not mean there is a "February effect").

What is the January Effect?

So what is the so-called January effect?

The January effect is a supposed outperformance by stocks in the month of January. One of the reasons explaining the January effect is that investors sell beaten down stocks at the end of the year in December in order to claim tax losses (i.e., to offset any gains, thereby avoiding taxes), only to reinvest the money in the market come January. The supposed influx of money into the stock market in January then causes the market to rise. If this hypothesis were true, we would expect to see a stock market selling off in December, followed by an equal level of buying in January. As we are fresh off new highs in the Dow (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY), this does not appear to be the case this year.

Other Supposed Explanations

Another theory discussed here explains that the January effect is due to yearly Wall Street bonuses being based on fund performance through October or November, but not through the end of the year, causing fund managers to reduce risk at the end of the year by taking money out of equities. Come January, however, everything resets and fund managers need to be invested in stocks again. This explanation seems plausible, but again, we would likely see a selling off of equities toward the end of the year, which we have not seen.

Yet another theory about the January effect involves "window dressing" by fund managers. They sell equities at the very end of the year and invest in hot stocks (such as Alibaba (NYSE:BABA) or Apple (NASDAQ:AAPL)), so that on December 31st, the date on which prospectus holdings are based, they show that they have all of the popular stocks in their portfolios. Again, this would not explain why there'd be a rise in stock prices in January, since both the buying and selling are occurring before the end of the year.

Another theory is that retail investors resolve to save and invest more each year as a new year's resolution. This seems plausible; however, it seems that the likely impact would be so small as to appear negligible. In addition, it implies that retail investors have money sitting on the sidelines, missing out on the 5+ year bull market we've seen since 2009. On the face of it, this does not appear to be a strong enough reason to explain the so-called January effect.

What about rebalancing? Could portfolio rebalancing explain the January effect? Portfolio rebalancing is when a portfolio (be it the portfolio of a retail investor or of a fund manager) deviates from its established asset allocation throughout the course of the year because some asset classes outperform others. In order to get back to the established (i.e., ideal) asset allocation, it's necessary to rebalance the portfolio. This would involve selling stocks and buying bonds in years when stocks have outperformed bonds (assuming the asset allocation hasn't changed). In recent years, stocks have outperformed bonds, meaning that a January rebalancing out of stocks into bonds would tend to have a negative impact on stocks, negating the January effect.

January Effect on Small Caps

Yet another theory postulates that the January effect is more pronounced for small cap stocks. The data, however, would suggest otherwise. The table below shows Russell 2000 January returns vs. S&P 500 January returns since 2009. On average, the Russell 2000 has averaged a 0.9% gain for January vs. a 0.8% gain for the S&P 500. This would seem to be a small outperformance in January for the small caps over large caps. However, given that the Russell has outperformed the S&P 500 on overall returns since 2009, it's not surprising that returns are slightly higher in January for small caps vs. large caps. In other words, there's nothing special about the month of January, but rather, small caps have had a slight outperformance over large caps since 2009.

Russell 2000 vs. S&P 500, January Returns

Russell 2000 (%) S&P 500 (%)
2009 -12.2 -10.9
2010 4.5 2.9
2011 5.4 3.2
2012 2.2 4.1
2013 1.0 1.1
2014 4.6 4.3
Average 0.9 0.8


More Theories

Other theories exist, both about what the January effect actually is, as well as the underlying cause of it. It has been suggested that the January effect is "as January goes, so goes the year." However, as stocks generally tend to trend upwards, it's not surprising that the majority of instances in which stocks rise in January result in positive years overall. It has also been suggested in recent years that because people know about the January effect, efficient markets have led to the so-called "Santa Claus rally" in December, which leads into the January effect (also known as the December/January effect).

Still others postulate that the January effect has not shown up in "recent" years due to the implementation of the 1929 wash sale rule, which prohibits investors from purchasing shares of a stock within 60 days of selling the same stock for a loss (i.e., for tax purposes). Others have also suggested that with the modern-day prevalence of 401K accounts, less investors are actively trading shares, thus minimizing the January effect.


It's always possible to find historical data that shows seasonal stock market outperformance. In some cases, there may be plausible reasons. In most cases, it's just normal fluctuations and variations. The unpredictability of it all will make some time periods look better than others, when really it's just random. Financial writers throw all kinds of numbers at us and assume there's something of great importance to be learned simply because the first set differs from the second set. Rarely do we find studies involving true statistical rigor, i.e., a big enough sample size with statistically significant results (read, p-values less than 0.05, etc.) When such studies do surface, everyone quickly learns about them and any edge investors might gain quickly goes away.

The bottom line is there does not appear to be general consensus on what the January effect even is, let alone the underlying causes of it. Any supposed gains appear to be minimal, at best. Meanwhile, the risks of deviating from your investing strategy (i.e., by trying to capitalize on the January effect) could be significant, especially if you have money sitting on the sidelines during a bull market. Ignore the January effect. Stick to your investing strategy and you'll be fine.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.