The January Effect And Other Seasonal Indicators

January

The financial media outlets use terms like the ‘January Effect,’ and ‘January Barometer’ with little discussion of what is meant or how accurate either of these indicators may really be.

A theory was introduced in the 1940s that returns for the month of January were greater than those of other months and most noticeably greater within small-cap stocks. This is what is now called the “January Effect.” When we look at a stock index that includes large and small-cap stocks like the Wilshire 5000, January is not the month with the highest returns. Over the past 50 years, the month of April has returned almost .5% more than January. And both November and December have also seen higher monthly returns than January.

The January Barometer refers to a theory that how stocks perform during the first month of a new year is a signal for how the stock market will perform over the next eleven months. In other words, if the return of the S&P 500 in January is negative, this would predict a declining stock market for the remainder of the year, and vice versa if returns in January are positive.

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