The January Effect
Darren L. from Boise, ID asks: Hi Mitch, Happy New Year! I’m curious if you think there’s anything to the so-called “January Effect”? It feels like 2025 is set up for a January rally given the choppiness that happened last December. I’m asking because this year I plan to sell stocks to have cash for the full year, and I’m wondering if I should go ahead and do it or wait until prices recover. Thanks for your insight!
Mitch’s Response:
Thanks for writing, Darren, and Happy New Year to you as well! The January Effect, in my view, is one of the many ‘seasonal effects’ that may have worked for a time historically, but whose predictive power probably diminished at this point.
Early in my career, there was something to it—many investors and mutual funds would harvest gains and losses near the end of a calendar year, and then scoop those shares back up in January. There was a reasonably good argument that these actions helped bolster stock prices in the new year. Going back to 1928 (which predates the current S&P 500 as we know it), January would see an average return of +1.2%.1
But the ‘effect’ is far less pronounced today. Looking at just the last 35 years, the average return for the S&P 500 in January is +0.5%, which doesn’t make it much different than any other month in the year. Now to be fair, I have seen some recent research showing that the previous calendar year’s laggards tend to outperform in January. In the last 35 years, S&P 500 companies that declined by -10% or more in the previous calendar year post an average return of +2.3% the following January. But I’m not sure this seasonal trend makes for a very robust investment strategy.
As it relates to your question, I would certainly advise against trying to strategically sell stock or other securities on such a short time frame. Your strategy to raise cash should be more about keeping your investment portfolio’s asset allocation aligned with your goals, risk tolerance, and time horizon. It should not necessarily be about making the most profitable trade in a four-week time span.
Big picture, the data clearly showed the January effect was real for many decades. But in my view, markets eventually discounted the positive surprise – deeming it no longer effective. Markets work efficiently to discount widely known information, in my view, so it was only a matter of time before the January effect stopped working.
1 UBS. December 11, 2024. https://advisor.zacksim.com/e/376582/arketnews-article-1729783-html/5scgnj/1113594162/h/1jKdAg0gX51xM_PO4BEci1bvkW0YcvXLuTh2SIf-tt8
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