The “January effect” does not hold up with stocks. But bonds are another story.

The January Effect is a theory in financial markets that has been around for over 50 years. He says stocks and other assets seem to increase the most in the first month of the year.

But a closer look shows that, for stocks at least, the reverse has been true for the past 20 years. Since January 2000, on average, if you’ve bought US or international stocks at the start of the month and sold at the end, you’ve actually lost a considerable amount of money.

Surprisingly, however, the January effect continues to be true for fixed income securities. Since 2000, if an investor had bought bonds in January, the return for that one-month period on average was 0.20 percentage point higher than the average return for any other month of the year. It might not seem like much, but in the bond market where it’s a game of inches, it’s a significant amount.

Data goes back to 1950

To implement this study, my research assistant Kevin Mocknick and I collected performance data for all mutual funds since 1950. We then separated all funds by their investment strategy and allocation: US large cap stocks, US small cap stocks, US value stocks, US growth stocks, international stocks and fixed income (bonds). With these scores, we then looked at the average return for each group during the month of January and the average return for all other months (February to December).

The first observation is that from 1950 to 1999, the January effect was considerable. For example, if you were to buy large cap stocks in January, you got an average return of 1.89% in that month. If you held for the rest of the year, you only averaged a 1.02% return each month after January. This equates to a difference of 0.87 percentage point. For small-cap stocks, this difference climbs to 1.82 percentage points.

Buying shares in early January was therefore an extremely profitable strategy. Another way to take advantage of the January effect during this period would have been to use leverage (or buy on margin) to overweight your portfolio in equities in the first month of the year.

Theories as to what caused the January effect, when it was still boosting stock returns, include phenomena such as portfolio rebalancing due to taxes, or investors putting their end-of-year bonuses to profit on the stock market for start the year. .


However, from 2000 onwards, the January effect for equities reversed. If you were to buy large cap stocks in early January for the past 20 years, your average return at the end of the month was negative 0.53%. And relative to the average returns for the other months of the year during that time period, the stock return for January fell on average 1.39 percentage points. For all share classes, January turned out to be a losing month on average. And this month of January seems to start on the same path; On Friday, the S&P 500 was down 1.9% to start the year.

The only obstacle is the fixed income. Investments in bond funds in January over the past 20 years have averaged a one-month return of 0.53%. If you had held for the rest of the year (February through December), you would have gotten an average monthly return of 0.33%. This equates to a difference of 0.20 percentage point.

If you’re looking to get ahead of other bond market investors, it seems like buying early in the year is paying off.

Dr Horstmeyer is Professor of Finance at George Mason University’s Business School in Fairfax, Virginia. He can be reached at the address [email protected].

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