The January effect

Have you heard about the January effect? If not, here we go:

Between 1980 and early 2021, the Russell 2000 index of small stocks averaged a gain of 18.2% in January (on an annualized basis) compared with a 12.7% gain for large caps, as measured by the Russell 1000.

While it is not exactly clear why this exactly happens, market researchers who have studied the January effect think that year-end bonuses and dividends give investors extra money to invest, and they often put it into less-known and smaller stocks to start the new year. In addition, some investors may also sell stocks in December to claim a capital loss on taxes and then reinvest the money into smaller stocks with greater growth potential. Whatever the reason, the January effect is statistically significant and will give small caps an early head start on a big year.

Sven Franssen