What is the January Effect?

The market drops in December because investors seek capital losses for tax purposes. Then, in January, investors buy back into the market, boosting it higher.  The January effect is said to impact small cap stocks more than mid or large cap stocks.

Is the January Effect real?

Many say, “as goes January, so goes the rest of the year”. A study done by Ben Marshall, an economist at Massey University in New Zealand, estimates that between 1940 and 2008 the US stock market returned 14.4% in the 11 months after a rise in the market in January, compared to 3.2% in the 11 months following a fall in January.

The problem with the January effect is that financial markets try to exploit profitable opportunities as they are noticed. This is why the January effect is not as prevalent as it was in the mid-late 1980s. In fact, over the years, specialist funds set up just for the January effect.

How’s this year going?

This year is not going so well. We are half way through January and the S&P 500 is down 0.52%, and the S&P SmallCap 600 is down 0.86%. This is not a good indicator for the rest of the year.

How do you think the market will perform this year – especially after 2013 returned over 30%?