The January Effect
The ‘January Effect’ is one of the most popular stock market anomalies on the calendar, often propelling returns into the New Year. Between 1928 and 2019, the S&P 500 has risen in 63% of January months, and some think that according to the “first five days rule”, possible upside in 2020 might not end there.
Markets have made gains following these first, five trading sessions of this year, and that alone has gotten a bunch of stock market historians bouncing in their chairs. Since the new millennium, sentiment at the starting gun has revealed itself to be a valuable meter reading for year-end returns. “As goes January, so goes the year,” they say!
Give a big hand to market pathfinder Sidney Wachtel, who discovered the January Effect more than eighty years ago. He reckons that to take maximum advantage, investors should configure their holdings with smaller stocks that have more to prove. The middle of the month is also best, but be warned, there’s no such thing as a free lunch!
Positive odds of 63% still imply negative odds of 37%. Given that investors must double their money to recover from losing half of it, many take those odds seriously and stop short of betting the ranch on unexplained market glitches.
Instead, they exclusively focus on their own fundamental and technical analyses of businesses. This is definitely the smarter move for eleven months of the year, but investors looking for every possible edge won’t let the January train leave without them. It’s final boarding!
