What’s the Stock Market ‘January Effect’? Is It Real?

For decades, a popular theory has held that US stocks tend to rise more in January than in other months. The existence of this phenomenon, known as the January effect, once appeared to be undeniable as studies showed gains several times larger in January than in an average month. The effect was most pronounced among small-company stocks from 1940 to the mid-1970s. But it seemed to shrink through around 2000 and hasn’t been as reliable since. Today, many investors are skeptical of a January effect occurring in 2024 because of a run-up in stocks in the last two months of 2023.

The discovery of the January market anomaly is widely attributed to Sidney Wachtel, an investment banker who ran an eponymous financial firm and identified the January outperformance in 1942. Using about two decades of data, he observed in a published paper that smaller stocks, which typically trade in lower volumes than large-company stocks do, tended to rise and outperform their larger peers considerably in January. Later research confirmed the anomaly, with a seminal 1976 study of an equal-weighted index of New York Stock Exchange prices finding average January returns of 3.5%, compared with 0.5% for other months, using data going back to 1904. A Salomon Smith Barney study of market data from 1972 to 2000 found a smaller but still measurable effect. The effect faded after 2000, according to several studies. For three decades beginning in the mid-1980s, the Russell 2000 Index — a bellwether for small-cap stocks — averaged a gain of 1.5% in January for the third-best month of the year, according to data compiled by Bloomberg. But since 2014, the index has averaged a loss of 1% for the month as the frenzy over megacap technology stocks such as Inc. and Alphabet Inc. gained steam.

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