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Dispatches Stock Strategies

Has the January Effect Widened?

A study hypothesized that the January effect may have expanded to include the second half of December and the first half of February.

by Jamie Fan | May 2023

A study hypothesized that the January effect may have expanded to include the second half of December and the first half of February.

Long debated is the existence and extent of a seasonal investment anomaly called the January effect, which is the tendency of stocks to rise during the first month of the year, particularly small caps. Reasons for the effect include end-of-year sell-off of poor performers to enhance balance sheets, the anticipation of the first earnings releases of the year and increased trading around January’s two public holidays.

Two time periods were examined for evidence that the January effect has widened. For the first period of January 1992 to December 2010, only the Russell 2000 index experienced higher returns during the second half of December. The S&P 500 index, the Dow Jones industrial average and the Nasdaq composite did not realize returns over the longer stretch that were significantly higher than those from the rest of the year. Over the more recent period of January 2011 to January 2023, returns from mid-December to mid-February were abnormally higher for all four indexes compared to the rest of the year.

The study’s authors offer explanations for the extended time frame. One is trader reaction to the currently identified calendar anomaly. The stock market’s seasonality is becoming a “self-fulfilling prophecy” as traders exploit the known high-return periods. Market liquidity and transaction costs may also be contributors. Additionally, some investors may be hesitant to buy stocks in January because of known uncertainty and high stock prices. Those investors may prefer purchasing in the latter half of December or in early February. Finally, it is possible that the Christmas holiday may disrupt trading and thereby lead to abnormal year-end return opportunities.

“The Extended January Effect on United States Capital Market,” by Razvan Stefanescu and Ramona Dumitriu; SSRN, March 2023.

Discussion

ERNEST H from CA posted over 3 years ago:

It would be of interest to compare the behavior of a group of stocks which say had lost money in the preceding one year and had gained the most by December 15th of a year. The first might be oversold in December to take tax losses, and thus more likely to rebound in the first part of the new year than the 2nd group.


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