January Are We There Yet ?

What Does January Effect Mean ?

A January Effect is a general increase in stock prices during the month of January. This rally is generally attributed to an increase in buying, which follows the drop in price that typically happens in December when investors, seeking to create tax losses to offset capital gains, prompt a sell-off.

The January effect is said to affect small caps more than mid or large caps. This historical trend, however, has been less pronounced in recent years because the markets have adjusted for it. Another reason the January effect is now considered less important is that more people are using tax-sheltered retirement plans and therefore have no reason to sell at the end of the year for a tax loss.

Over time several articles have mentioned the January Affect which is based on how the market finishes the month of January. For example if January finishes with a negative return then the market will end down for the year and vice versa. We went back and looked at the Dow for the period from 1915 through 2007 to see what the actual results have been.

The table below shows that when the Dow has had a positive January Return, 50 out of 61 cases (82%) were followed by a positive Yearly Return. On the other hand when the Dow had a negative return in the month of January 21 out of 32 cases (66%) ended up with a negative Yearly Return.

January Affect (1915-2007)

Jan (+ Gain)
Yearly Return (+) = 50 (82%)
Yearly Return (-) = 11 (18%)

Jan (- Gain)
Yearly Return (+) = 11 (34%)
Yearly Return (-) = 21 (66%)

Based on these results the January Affect has been more accurate when the Dow finishes the month of January with a positive return versus a negative return at least going back to 1915.