Can You Gain an Edge with the January Effect? We Have the Answer Inside.

By TradeSmith Editorial Staff

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For many people, the new year is a time to press the reset button — to whip into shape after the indulgences of the holiday, tackle their goals, and improve their overall performance.

There’s a perception that the stock market undergoes a similar revitalization, in the form of rising prices. This idea that the market tends to perform better at the start of the year is called the “January Effect.”

The term was coined by Sidney Wachtel, an economist and banker who studied seasonal movements in the stock market. He expanded upon the idea in his 1942 paper, “Certain Observations on Seasonal Movements in Stock Prices.”

There are several possible reasons why stock prices seem to go up.

It could be because people were selling off stocks in December for tax purposes.

It could be because people just received a bonus in January.

Or it could be because, with a hectic holiday schedule from November to December, people have more time to devote to investing in January.

Whatever the cause may be, the TradeSmith team is more interested in what the data is telling us now about the accuracy of the January Effect theory.

So let’s take a look.

Using the SPDR S&P 500 ETF (SPY) as our reference point, from January 2009 to January 2022, stocks were up 57% of the time in January and down 43% of the time.

Going back even further, since 1993, we see the exact same numbers, with positive returns in January 57% of the time and losses 43% of the time.

If you’re looking to gain an edge, it appears unlikely you’ll find one by investing more heavily in January than other people.

What’s more important is understanding the market landscape around you, and when I was on episode No. 260 of the Stansberry Investor Hour in May, I said it was time to stand up and be a “real investor.”

Although that was several months ago, I still believe that many of the concepts shared are timeless, which is why I put together this outline of what it actually looks like to be a real investor and take control of your financial well-being.

In addition to adding the real-investor tips to your arsenal of resources, I’ve also been working on something pretty cool with our team on how to navigate 2023, and I’m excited to share more about it next week.