Is there a January Effect? Should I buy into the Stock Market Now?
You might have heard about something called the January Effect – the expectation that markets rise in January. The explanation is usually that investors sell in December to get tax losses and then buy back in January. Or, that when the new year hits, new investing strategies are pursued, causing increases in the market.
And in fact, it used to be true in the US. Once study that looked at data up to 1974 concluded that the average return for (US) stocks during the month of January was five times greater than for any other month of the year, especially for small-capitalization stocks (relatively small companies). But, in a study that looked from 1972 to 2002 the outperformance was only for small-capitalization stocks and the difference was only 0.82% - not enough to change investing behavior.
We did our own analysis using Canadian market data (TSX). The average annualized return for January over the period from 1980 to 1990 was 24% versus an average return of 12% in the decade – so it looks like the January effect held in the 80’s. In the 90’s, the annualized return for January dropped to 9% compared to 11% for the entire decade – the opposite of the trend we are looking for. In the 2000s the January return averaged 7% with a 4% overall return. And, as for the latest decade (so far), January averaged 1% with a 2% overall return. I think it is fair to say that there is no clear January effect (anymore) in the Canadian markets.
So, what to do now that the market has recovered a bit from one of the worst corrections of all time? As we always say on our site, keep following your strategy. As usual the pundits are split on whether we are at the start of a multi-month bear market or if we’ve just experienced a correction and we’ll start going up again in 2019. So, if you were planning to invest now, it is a good time to do it. If the correction is over you’ll be buying at the bottom. If it is the start of the bear market then you’ll suffer some losses but you’ve likely already missed the worst of it.