Will There Be A January Effect in 2017?

The well-known “January Effect” refers to the stocks’ superior returns during the month of January.  Historically, average January stock returns are much higher than the average returns of other months.  The cause for January effect has been more convincingly linked to the investors’ year-end tax-loss selling behavior.   Both retail and institutional investors tend to realize the capital loss of the losers to offset the realize capital gain of the winners.  So, selling the losers before the end of the tax year and buying them back later, subject to “no wash-trade rule,” is a plausible explanation for the depressed December ending prices.

In fact, the high January return is more of a result of the low December stock prices than high January prices.  Therefore, January Effect is also referred as “December Effect.”  January effect is more pronounced for small-cap and value stocks as they are often the loss leaders.

For many obvious reasons, the “well-known” January Effect for stock market has quickly dissipated over time.  While Russell 2000 January returns have been traditionally 2.5 times of the other months, for the last decade, January return is, at best, at par with other months.

That being said, for the 15 years when December was down with an average -4%, the following January staged a rally of +2.2%.  For the 15 years when December was up with an average of +4.85%, they were followed by flat (+0.40%) January returns.

Keep in mind, the Russell 2000 index returned +2.46% for the month December (12/28/2016).

Of course, 2016 is special!  It is an election year.  For the last 7 presidential elections, 4 of the 7 January returns were negative with an average -6%.  The other 3 positive January returns averaged +0.50%.

Since November’s Election Day, the stock market has risen around 10% across the board without significant fundamental news.  For all practical purposes, the 2017 January effect, if any, has most likely already happened.


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