The January effect and small cap stocks

There is something that investors should be aware of. It is called: the January effect. Basically, the January effect means that small cap stocks tend to outperform large caps in January. According to ·The Stock Trader’s Almanac”, between 1980 and early 2021, the Russell 2000 averaged on an annualized basis a gain of 18.2% in January compared with a 12.7% gain for large caps, as measured by the Russell 1000.

But deeper research showed that the usual January small cap rally actually begins in mid-December. Over that same time period from 1980 to 2021, from December 15 through the end of January, the Russell 2000 gained 38.6% on average annualized, while the Russell 1000 gained 22.2%.

Researchers believe that year-end bonuses and dividends give investors extra money to invest, and they invest such funds often in smaller stocks to start the new year. Some investors sell stocks in December to claim a capital loss on taxes and then reinvest the money into smaller stocks with greater growth potential. Buit whatever the reason for this is the January effect is statistically significant.

Sven Franssen