The January Effect

The January Effect refers to the observation that stock returns appear much higher in January than other months. There’s a beautiful wiki on the effect ( https://en.wikipedia.org/wiki/January_effect ) so I won’t go into much detail on it, except to say that:

1. The first thing that came to my mind regarding this effect is taxes – people sell in December to harvest tax losses/gains and then rebuy in January

2. From my understanding, this effect may no longer exist – papers come out both ways on this with recent data.

3. Here’s what Equities Lab has to say about the issue.I ran three backtests – all used data from Jan 1 2000 to today, had a monthly rebalance over all stocks (including illiquid small stocks) – the first does all months, the second does all months except January and the third does January only.

allstocksjan

nonjan

janonly

To compare the three, we can normalize everything to 12 month returns –

All months annual returns = 1.0055^12 –> 6.8%

Non January returns = (1.0048^(12/11))^12 –> 6.5%

January only returns = (1.0007^(12/1))^12 –> 10.6%

In light of this evidence, I think there’s a case to be made that some version of the January Effect still exists.