Jumping Into The "January Effect"

January 12, 2023

Did you known that January derives its name from Janu, the Roman mythological god of beginnings and transitions? Janu was said to be the protector of gates, doorways and paths; which is greatly befitting because many of us view January as the door that opens up to the New Year.¹

For most of us living regular lives, January is many things: the start of a new year, the first of seven months within the year to have a length 31 days and in some countries, one of the coldest months of the year. For concerned investors, it can also mean one thing – the “January Effect”.

Investment banker Sidney Wachtel first noticed this effect in 1942. Using data going back to 1925, he noticed that small-cap companies tended to outperform large-cap companies, especially in the first half of January.²

The January Effect refers to the hypothesis that stock market prices have the tendency to rise more during the first month of the year, than in any other month. The cause? Some attribute it to tax-loss harvesting, positive consumer sentiment, plowing in of year-end bonuses, and more. It can take on a psychological meaning as well – with January heralding new beginnings, many investors also tend to think of it as starting on a clean slate.

To Prepare for the January Effect – Know The Fundamentals

If you hold small-cap stocks, you may consider recalibrating in December to combat the impact of a possible January price increase. This creates a chance for you to lock in some gains and keep your asset allocation in good balance.

To succeed at this, you need to know the fundamentals well. It involves researching aspects that make up the company’s financial health including revenue, growth potential and profit margins; along with other areas such as organisation management and market position.³