Does the "January Effect" Still Exist?

February 7, 2022

By Jonathan Smith
Securities Analyst

New year, new goals. January has typically been a time for us to review our past successes and try to improve on anything that didn’t meet our expectations. Often, we look for patterns and trends to help guide our decision making for the upcoming year. Investments are no different.

What is the “January Effect”?

The “January Effect” is a perception that stocks tend to rise during the first month of the year.

Between the years 1890 and 2019, January outproduced every other month in the stock market by 0.8%.

Chart
Source: Schroders

There are several explanations that contribute to this rally pattern. First, through rebalancing, investors typically buy back stocks that were sold for tax purposes in the prior year. Another reason may be that January is a good time for new investors to follow through on their New Year’s resolutions by beginning to trade stocks, driving activity up.

In any case, some investors theorize that a good January in the stock market is a good predictor for the rest of the year, and they use the signal to make decisions for the upcoming year’s investments.

How has the Theory Fared Recently?

The January Effect has not held up during the last three years — including last month. January 2022 was a tough month for investors, as both stocks and bonds fell. The S&P 500 closed the month down 5.3%. This decline was attributed to increased projections of potential rate hikes by the Federal Reserve. This caused investors to sell out of some of their speculative and higher valued growth stock positions.

However, a tough January doesn't necessarily paint a bleak picture for the rest of 2022. The chart below shows the S&P 500's monthly returns during the last three years. As you can see, in contrast to previous trends, January has not been a reliable predictor of the remaining months of the year.

chart
Source: New York Times

While historically January has been a strong month for stocks, it does not always provide a clear prediction of how the remainder of the months may perform in the markets. There are many factors in the economy, and things like current events and world headlines will continue to be factors. Therefore, following the “January Effect” theory may not always prove to be the best guide for predicting future performance.

Our Take

At Security National Bank, we structure our clients’ portfolios to meet changing market conditions. Diversification plays a large role in reducing volatility in challenging market environments. Please reach out to your Wealth Management advisor to discuss any questions that you may have on our strategies.

About the Author

Jonathan Smith

Jonathan Smith is a Securities Analyst for the Security National Wealth Management team. He has more than 10 years of experience in the investment and financial field. He is a graduate of Briar Cliff University in Sioux City where he lives with his wife and growing family. In the community, Jonathan serves on multiple boards, including the Fiscal and Public Policy Commission for the City of Sioux City, Girls, Inc., the Siouxland Community Foundation and the Ronald McDonald House of Siouxland.

How to Master the Psychology of Judgement in Investing April 22, 2024

Daniel Kahneman is best known for his work on behavior and the psychology of judgement in decision making. Kahneman and his colleague Amos Tversky’s research laid the foundation of behavioral economics/finance. Their research demonstrated people often make mental errors and have cognitive biases, this was contrary to most classical economic models at the time, which were based on a “rational being” to explain people’s economic decisions. The world of behavior finance continues to expand building on the foundation of Kahneman’s early research.

Spring Cleaning: Time to Cultivate Your Financial Plan April 15, 2024

As the old adage goes, April showers bring May flowers. Depending on where you are from or walk of life, this proverb can take on many meanings. The way I interpret the classic saying is that April represents a time for preparation. A time to do some spring cleaning and tackle projects neglected during the winter months. For farmers, it means a return to long days in the fields. For accountants, it signifies the conclusion of an arduous three months of tax preparations. At Security National Wealth Management we feel now is a great opportunity to assess your financial plan and ensure you are on the right path to achieving retirement goals.

Look What's on the Verge of a Major 40,000 Milestone April 1, 2024

In early December 2020, my colleague, Michael List, published an article marking the Dow Jones Industrial Average hitting the 30,000 milestone. In that article, Michael describes four different methods that each provide us with an educated guess as to when the Dow would cross the 40,000 milestone, with guesses ranging from two to six years. Michael said that the 40,000 milestone probably would be here faster than we expect but that it ultimately would leave us with more questions, e.g., when would the Dow reach 50,000? And now, about 40 months later, or 3.33 years, the Dow is approaching 40,000, causing us to guess when it ‘turns’ 50,000. To continue our analysis, let’s use the same methods utilized by Michael to predict the arrival of the Dow at 50,000.