The Bitter Reality of the Stock Market “January Effect”

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A myth gets destroyed by facts.

We’re going to read about the “January Effect” on a daily basis for the next few weeks. It’s the time of the year when the stock market in the US rises because it’s January. It’s a great time to buy, the hypothesis goes. It has been around for decades and resurfaces every January.

It’s based on the idea that there are some powerful seasonal anomalies that cause stocks to rise in January. These are among the most often touted reasons:

  • Tax selling by investors in late December to “harvest” losses they had on some stocks to offset capital gains they’d realized on other stocks. This common tax strategy, according to the “January effect” hypothesis, leads to more emphatic buying in January, big enough to move the needle.
  • Bonus time, when sudden piles of money in the hands of individual investors begin percolating through the economy, and the first thing the lucky ones buy is stocks, so the theory.
  • Psychology, as investors, based on a new year’s resolution or whatever, decide to finally be smart about money, etc. and buy stocks.
  • The “January effect” itself, as investors start acting on it and buying stocks partly into the month, assuming it is touted enough in the media.

The theory is based on the notion that the stock market is inefficient. All calendar-based stock predictions are based on it. And markets are inefficient. They’re manipulated by central banks, governments, and the financial industry in myriad ways. But they don’t care about January.

If the “January Effect” really were so predictable, wouldn’t market participants prepare for it by front-running it and buying ahead of time in order to benefit from it? Alas, if everyone buys ahead of time to realized the gains at the end of January, wouldn’t that eliminate from the outset the effectiveness of the entire “January Effect?”

Yep. It sure would. And it does. Or something does. Because… since 2006, the “January Effect” produced positive results in five Januaries and negative results in six Januaries:

So these past eleven years show that currently the “January Effect” – no matter what it was in the 1960s or 1970s – is more or less a random occurrence and of zero help to investors. It means if you bet on the “January Effect,” you have to be lucky make money.




The “January Effect” has a second meaning, the “January barometer,” a theory that says the performance of the stock market in January reflects its performance for the rest of the year: “As goes January, so goes the year.”

The chart above shows that if this happens, it is also just luck. Over the past 11 years, there were six Januaries when the S&P 500 slid, and in some cases steeply. But in four of those six years, the S&P 500 ended up rallying for the year:

  • 2009: +23.5%
  • 2010: +12.8%
  • 2014: +11.4%
  • 2016: +9.5%

Of the six years when the S&P 500 dropped in January, it predicted the rest of the year correctly only twice: in 2008 (-38.5%) and in 2015 (-0.7%).

However, of the five Januaries when the S&P 500 was positive, the entire year ended up positive. So can that predictive quality – if January is up, the year will be up – be relied on?

It just so happens that over the past 14 years, thanks to massive central bank intervention, the S&P 500 ended the year in the red only twice (2008 and 2015), or rather, just once (2008) because in 2015, the loss was only -0.7%, and dividends turned the whole year in terms of total return into a gain of +1.4%.

That’s why most of Wall Street always predicts that stocks will always go up. More often than not they do. And so that prediction will be correct much more often than not. And if stocks crash, central banks soon flood the land with cheap credit and QE so that they do go up.

This has worked to the point where the distortions have now reached dizzying levels. So central bank actions, particularly QE, have been far more accurate than the utterly useless “January Effect” in predicting annual stock market returns because they actually attempt via the magnificent power of the printing press to inflate asset prices. But even those efforts have become less accurate predictors recently, as seen in the EU and Japan, where more and more QE and negative-interest-rate absurdities accomplish less and less.

In terms of currencies, 2016 was a mix of deceptive calm, hair-raising craziness, and big surprises. Read…  The Almighty Dollar and the Currencies that Crushed it in 2016




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  26 comments for “The Bitter Reality of the Stock Market “January Effect”

  1. d
    Jan 2, 2017 at 9:26 pm

    Wolf,

    That chart is out of sync with the market.

    True.

    Partly due to CB interference creating a false market.

    It is basically in sync, with the real economy. ????????

    +

    I am still working my time zones on the indexes, daily, and it still has a money making average.

  2. Sporkfed
    Jan 2, 2017 at 10:22 pm

    Easy come, easy go.

  3. Michael Francis
    Jan 3, 2017 at 12:41 am

    I’ve long wondered if the millions of computers that connect mum and dad investors around the globe into the stock market are influenced by a handful Wall Street stock peddlers who can manipulate its buy and sell instruction seeking internet crawling software.

    • Coaster Noster
      Jan 3, 2017 at 1:41 am

      The “mum and dad investors” are no longer a factor in the stock market, as far as dollar volume of trades go. Day to day, people are influenced by whatever is on television, but again,…..they are a fraction of the trading volume, and so they are inconsequential.

    • Matt
      Jan 3, 2017 at 8:25 am

      No

  4. Tom Kauser
    Jan 3, 2017 at 4:39 am

    First week is all about fresh fund allocations and if strong enough may get to 20k (20085) I expect 20k to get sold hard as earnings start reflecting stronger dollar and huge holiday sales disappointment?
    I could see buying out of the money puts starting Friday but I would not be strongly committed to turning negative completely as the dollar could begin to pull back which would signal another leg higher and a better longer term short?

  5. mvojy
    Jan 3, 2017 at 8:21 am

    Why invest in low interest treasuries when you can inflate the hell out of the P/E on companies showing no earnings growth but boost the bottom line by shafting the American worker?

  6. Greatful again
    Jan 3, 2017 at 9:53 am

    How about January sets the tone for the rest of the year? Accurate?

    • Jan 3, 2017 at 10:38 am

      Sometimes it does. Sometimes it doesn’t. It’s just not reliable.

  7. OutLookingIn
    Jan 3, 2017 at 10:14 am

    The majority of what is perceived as “wealth” in the markets and by it’s participants, is debt based. There is a distinct high level of investor complacency. Remember, bonds are just debt.
    Bond yields are rising because of growing global political/financial uncertainties. Historically, bond risk premiums rise in sync with higher political/financial turbulence.
    The thirty plus year bond bull market is dead. Bond holders are dumping their bonds. Too many bond sellers and not enough buyers in the market drive interest rates up. The sellers take this newly “found” liquidity and pour it into the stock markets seeking yield.
    The “wealth” perception is slowly changing, (all though most will be behind the curve) and with this newly perceived outlook, an enormous amount of presumed notional “wealth” will simply vanish.

  8. DB Turton
    Jan 3, 2017 at 11:12 am

    Learned some time ago that when the cold-call stock and precious metals advocates get you on the phone that it is soon (very soon) time to go short!!!

  9. OutLookingIn
    Jan 3, 2017 at 11:49 am

    Wolf,

    Why do you not allow comments to be posted to your “sponsored posts”?
    eg: Silver One (SVE.v)

    http://www.incakolanews.blogspot.ca/2017/01/silver-one-svev.html

    • Ross
      Jan 3, 2017 at 1:10 pm

      Outlookingin, this is a free site, unlike the one you linked to where one pays.

      Wolf needs income to keep this free site going.

      The sponsor pays Wolf, like his other ads do. And adblockers cannot weed out his sponsored posts.

      There are no comments area for the other ads either, that you can just block.

      • OutLookingIn
        Jan 3, 2017 at 1:25 pm

        Ross,

        The linked site is free except for the weekly Friday report.
        Did you investigate the sponsored stock? Due diligence?
        If you did, then good for you. However, by the gist of your post, I gather you did not.
        Woe be to them who jump into stock positions that have been proven to be no more than pump-and-dump operations.

        • Jan 3, 2017 at 2:58 pm

          Agreed. ALWAYS do your research!! The Wall Street Journal, brokers, Seeking Alpha, every financial media company out there, they all very frequently point out opportunities to invest in one company or another, projecting where the stock will go. This is normal in the financial media.

          We rarely do this here. As you know, I’ve been accused in the comment section of just pointing out the negative. So occasionally we diverge and publish what others consider an opportunity.

          But rest assured, when we introduce a company with a sponsored post, no one here has a position in that stock, long or short. So no one here is going to pump it or dump it. It’s just a sponsored post with a lot of interesting info in it, introducing you to a company you’ve probably never heard of before.

          And again, I totally agree: ALWAYS do your own due diligence before investing.

        • Ross
          Jan 3, 2017 at 3:00 pm

          Well I did do due on that stock and did not buy, but I also did my due on another sponsored stock that is currently up 20% and it is looking good😏

  10. Maximus Minimus
    Jan 3, 2017 at 1:00 pm

    This time last year, the stock market was in a perilous slide, and the Bernanke/Yellen team started to worry if their economic witchcraft is finally being exposed.

    • NotSoSure
      Jan 3, 2017 at 1:09 pm

      They need not have worried. The only way they’ll be exposed if they are abandoned by their banker buddies.

      Looks like today will be another fail in terms of getting to 20K

  11. Dan
    Jan 3, 2017 at 1:27 pm

    I have a question. Is it possible for Chinese Mafia to print money such as US, Canadian, Australian dollars without getting caught? I find it very suspicious that Chinese citizens have so much money to be able to inflate real estate values in so many places. If that was the case, the Persian Gulf countries should have been able to cause similar inflation when oil was $140/barrel. The Chinese who are buying properties in these markets are buying as if their money has no value. There was a link posted here or maybe on YouTube a while ago about a property in Vancouver that was estimated at only $15 Mil, but some Chinese who was wanted be Interpol had bought it for $60Mil. Even a criminal who have earned easy money is not stupid to just throw money away. I have a feeling that one day there is going to be news about massive counterfeit money printing operations in China.

    • Maximus Minimus
      Jan 3, 2017 at 2:13 pm

      You are definitely on to something. Only the printing is not done by the Chinese mafia. The movement of that insane amount of cash across the border unnoticed is also aided and abetted by team Canada.

    • nick kelly
      Jan 3, 2017 at 5:51 pm

      The reason it looks like a lot of Chinese have money is that there are over a billion Chinese.
      One percent has access to cheap labor of the other 99 %
      China has over a billion people, but say one billion, or one thousand million.
      One percent of that would still be 10 million- this is most of what China enthusiasts call the the ‘upper middle class’, whereas in comparison to the 99 % they are very wealthy.

      Of those, ten percent will be very wealthy even by our standards.
      This leaves a million investors for overseas property.

      No counterfeiting necessary- unless you want to call the government’s relentless printing counterfeiting. The crime is the exploitation of the 99 percent.

      BTW: The Persian Gulf countries have been very active investors in prime London property for decades, but this has slowed with the oil crash.

  12. Bobby
    Jan 3, 2017 at 6:26 pm

    The more older I get, the more I have realized not to fight technical trends. The trend to Buy after an election and sell on inauguration day typically always pays off. Reality will soon set in, thanks for the chart! I’ll be selling a week earlier then on Jan 13th.

    • nick kelly
      Jan 4, 2017 at 12:14 am

      It sounds like you aren’t very old.
      Up until last year the scariest thing about financial advisers was that most of them had never seen an interest rate increase.
      The wild gyrations of the 80’s, when the Fed Funds rate hit 20 percent, and the near collapse of the world financial system in 2008, were driven by fundamentals.
      Technicals work until they don’t- then they are swept away by fundamentals.
      If you were in the market in 1929- you didn’t get even until 1954.

      • Bobby
        Jan 4, 2017 at 3:49 pm

        Actually the last time I remember a string of interest rate increases was Greenspan between late99 to early 2000. It didn’t end well the last week of March of 2000! I’m just saying everyone should have some cash on the sidelines..

  13. Jan 9, 2017 at 11:00 pm

    Great analysis of the January effect!

  14. John
    Jan 12, 2017 at 4:33 pm

    Don’t you ever worry about all those picayune stock market dips,Mr.Richter.If the History is any guide-please read on and be reassured.

    “Stock prices have reached what looks like a permanently higher plateau.”
    October 15, 1929

    “This is a shaking out of the lunatic fringe.I expect to see the stock market a good deal higher than it is today within a few months.”
    October 29,1929

    Irving Fisher,Professor Emeritus of Political Economy,Yale University

Comments are closed.