Certain months of the year appear more favorable for investing than others. Some seasonal market trends even have a place in market lore. But how does the data really stack up?
The phrases “January effect”, âsell in May and go awayâ and the âsummer doldrumsâ have some street cred but dubious records as investing strategies.
A rise in stock market volatility (trading) is another seasonal trend that may be seen in the fall of U.S. presidential election years.
Investing driven by seasonal market trends is essentially market timing, which can lead to missed opportunities and lower returns.
Everyone would like a tried-and-true formula for buying and selling investments. The quest for a âslam dunkâ trading strategy keeps people trying to spotâand profitâfrom patterns that may have been observed at one time or another.
Seasonal market trends are patterns that seem to turn up with the flip of a calendar page. Letâs take a closer look at a few of these trends that have entered market lore.
What’s All the Buzz About This Seasonal Stock Phenomenon?
Ever heard investors talk about the mysterious “January Effect” and wondered if it’s just another Wall Street fairy tale or something you should actually care about? You’re not alone! Today, I’m going to break down everything you need to know about this fascinating stock market phenomenon that’s been discussed for decades.
As someone who’s been watching market patterns for years, I’ve seen plenty of these seasonal “effects” come and go. The January Effect is perhaps one of the most well-known, but is it actually worth your attention? Let’s dive in and find out!
What Exactly Is the January Effect?
The January Effect refers to a supposed seasonal increase in stock prices during the first month of the year. First observed around 1942 by investment banker Sidney B. Wachtel, this theory suggests that securities prices tend to rise more in January than in any other month of the year.
In simple terms it’s the belief that stocks (particularly small-cap stocks) perform better in January compared to other months. If this pattern were reliable it would create an opportunity for savvy investors to
- Buy stocks at lower prices in December
- Hold them through January
- Sell them after their values increase
- Pocket the difference as profit
Sounds too good to be true right? Well, that’s where things get interesting!
The Supposed Causes of the January Effect
Several theories attempt to explain why this phenomenon might occur:
1. Tax-Loss Harvesting
The most common explanation revolves around tax-loss harvesting, Here’s how it supposedly works
- Investors sell losing stocks in December to offset capital gains and reduce their tax bills
- This creates a temporary sell-off and price depression
- After the new year begins, these same investors repurchase those stocks
- This renewed buying pressure drives prices up in January
2. Year-End Bonuses
Another explanation points to year-end cash bonuses:
- Many people receive their annual bonuses in December/January
- They invest this fresh capital in stocks
- This influx of money creates additional demand
- Increased demand drives prices higher
3. Psychological Factors psychology might also play a role:
- The new year brings renewed optimism
- Investors feel motivated to start fresh investment programs
- New Year’s resolutions about investing create market momentum
- This collective behavior could theoretically move markets
4. Window Dressing
Some theorists believe institutional behaviors contribute:
- Fund managers engage in “window dressing” at year-end
- They sell losing positions before publishing annual reports
- In January, they rebuild diversified portfolios
- This creates predictable selling and buying patterns
But Does the January Effect Actually Exist?
Here’s where we need to get real. Despite its popularity in market folklore, the evidence for a consistent, exploitable January Effect is… well, pretty unconvincing in recent decades.
Looking at the data from the SPDR S&P 500 ETF (SPY) since its 1993 inception:
- 18 winning January months (58%)
- 13 losing January months (42%)
These odds are barely better than a coin flip! And if we zoom in on the market rally period from 2009 through January 2024, the numbers are even less impressive:
- 8 positive January months
- 8 negative January months
A perfect 50/50 split! Not exactly the reliable pattern you’d want to bet your investment dollars on.
According to data cited by Nasdaq, January actually ranks 8th out of the 12 months in performance over the last 20 years. Middling at best.
What the Experts Say
Rebecca Walser, named as a top advisor by Investopedia, doesn’t put much stock in the theory (pun intended). She believes that if there is anything to the January Effect, it’s “much more attributed to human psychology than tax loss harvesting or mutual fund window dressing.”
Another top advisor, Preston D. Cherry, is even more dismissive, calling it simply “a folktale.” He emphasizes that investors should follow disciplined investment strategies tailored to their unique goals rather than chasing seasonal patterns.
What Research Tells Us
Over the years, numerous studies have examined the January Effect:
- Early research by Rozeff and Kinney linked the effect to patterns in investor behavior
- Keim expanded this research, suggesting institutional window-dressing and individual tax strategies played roles
- Haugen and Jorion associated the effect with behavioral finance factors
- Haug and Hirschey found that the anomaly persisted even after tax reforms in 1986
- More recent studies have shown that the effect, if it existed, has diminished significantly
What’s particularly interesting is that when researchers have found evidence of the January Effect, it’s typically been stronger in small-cap stocks rather than large-cap companies. This makes sense since smaller companies’ shares tend to be more volatile and potentially more influenced by seasonal patterns.
Why the January Effect Might Not Be What It Seems
Critics of the January Effect point to several important considerations:
1. Market Efficiency
The Efficient Market Hypothesis argues that financial markets reflect all available information, making it impossible to consistently outperform the market through patterns like the January Effect. If such an opportunity existed, traders would quickly exploit it until it disappeared.
2. Correlation vs. Causation
An important point that often gets missed: The better-performing January months historically correlate with stronger December months, not with December sell-offs. This contradicts the tax-loss harvesting explanation and suggests we might be misinterpreting what’s actually happening.
3. Changing Market Dynamics
Financial markets have evolved dramatically:
- High-frequency trading algorithms would instantly exploit any predictable pattern
- More investors use tax-sheltered accounts like 401(k)s, reducing the impact of tax-loss harvesting
- Institutional investors are more dominant, potentially changing historical patterns
4. Statistical Significance
When examining market data over many decades, finding some patterns is inevitable due to random chance. The question is whether these patterns are persistent and statistically significant enough to be useful for investment decisions.
Other Seasonal Market “Effects” You Might Have Heard About
The January Effect isn’t the only calendar-based market phenomenon that gets attention:
- January Barometer: “As goes January, so goes the year” – the belief that January’s market performance predicts the entire year (also lacks consistent evidence)
- Sell in May and Go Away: The idea that stocks underperform from May through October
- The December Effect: Where prices often increase in December (possibly due to holiday sentiment)
- The October Effect: Fear of market declines in October due to historical crashes in 1929 and 1987
Interestingly, September stands out as consistently the worst-performing month across multiple timeframes. This pattern has been much more reliable than the January Effect.
Should You Base Your Investment Strategy on the January Effect?
I think you can probably guess my answer here, but let me be clear: basing your investment strategy on the January Effect alone would be risky at best and potentially harmful to your portfolio at worst.
Here’s why:
-
Limited recent evidence: The effect, if it ever existed consistently, has become less pronounced in recent decades
-
Transaction costs and taxes: Even if you could predict a small January uptick, the costs of trading and potential tax implications might erase any advantage
-
Opportunity cost: Focusing on short-term calendar effects might distract you from more important investment considerations like fundamentals, valuation, and long-term growth
-
Market adaptation: Once patterns become well-known, market participants adapt to them, often making them disappear
A Smarter Approach to Seasonal Investing
If you’re still intrigued by seasonal patterns, here’s a more balanced approach:
- Consider seasonal factors as just one input: Don’t make investment decisions based solely on calendar effects
- Look at the broader context: Market conditions, economic indicators, and company fundamentals matter more
- Maintain a long-term perspective: Short-term patterns are far less important than your overall investment strategy
- Be skeptical of market folklore: Question “common knowledge” and look for actual evidence
The Bottom Line: January Effect Probably Won’t Make You Rich
While the January Effect makes for interesting market discussion, the evidence for its continued existence is weak at best. Even during periods when it appeared to exist, the effect was often small and concentrated primarily in small-cap stocks.
As the market has evolved, with more institutional investors, tax-sheltered accounts, and sophisticated trading algorithms, the likelihood of exploiting such a well-known pattern has diminished significantly.
Instead of chasing seasonal effects, I recommend focusing on:
- Building a diversified portfolio aligned with your goals
- Investing regularly regardless of the month
- Keeping investment costs low
- Maintaining a long-term perspective
- Making decisions based on fundamentals rather than calendar dates
The best investment strategy isn’t about finding magical months to buy or sell—it’s about consistent application of sound investment principles over time.
What do you think? Have you ever tried to take advantage of the January Effect or other seasonal patterns? I’d love to hear about your experiences in the comments below!
FAQs About the January Effect
Can you make money exploiting the January Effect?
Unlikely. Even if the effect were real (which is doubtful), investors attempting to exploit it would eventually eliminate the advantage through their collective actions.
Is the January Effect the same as the January Barometer?
No. The January Effect refers to stock price increases in January, while the January Barometer is the theory that January’s performance predicts the entire year’s market direction.
Do professional investors take the January Effect seriously?
Most professional investors view the January Effect with skepticism and don’t base their strategies on it. They might be aware of it but generally focus on more reliable factors for investment decisions.
Has anyone consistently made money from the January Effect?
There’s little evidence that anyone has consistently profited from the January Effect over long periods, especially after accounting for transaction costs and taxes.
If the January Effect isn’t reliable, are there any seasonal patterns worth considering?
September has historically been the worst month for stocks, showing more consistency than other seasonal patterns. However, even this should be considered just one factor among many when making investment decisions.
What Is the January Effect?
The “January effect” refers to the perception that the stock market rises in January more than in any other month. Academics decades ago called attention to the pattern, and explanations for it have changed over time.
In recent years, tax-loss harvesting is the most frequent cause cited for the January effect. The theory is that after selling some of their stocks at year-end for tax purposes, investors look for buying opportunities in January. (Tax-loss harvesting activity typically picks up between October and December, although its a year-round tax-mitigation strategy.)
Similarly, investors reengaging in the market and rebalancing portfolios after the holiday season may be another source of bullish January behavior. However, the record shows both good and bad Januarys for investing, with no statistically repeatable pattern to base a trading strategy on.
January had the highest total return for the year in only four of the past 20 years (2012, 2013, 2018, 2019).¹
Sell in May and Go Away
The financial adage to sell stocks in May encourages investors to avoid the possibility of market decline over the summer and fall and then reinvest in November. However, your account balance might be higher if you stay invested even through the marketâs worst days. One of the most remarkable bull runs in market history began in March 2009 after the Great Financial Crisis.
From May through October 2009, the S&P 500® Index increased approximately 20%.²
How does the Sell in May and Go Away theory hold up in todayâs markets? Dive deeper into stock market performance during summer months.
The phrase sell in May is related to another seasonal market trend: the summer doldrums.