January Effect Seems Likely: Buy Small-Cap ETFs & Stocks

After a bumpy ride in 2018 and a long list of woes, investors are concerned that the historical trend of “January Effect” will come into play this year. Notably, January Effect is a seasonal increase in stock prices largely due to year-end tax considerations. Investors re-deploy their capital to speculate on weaker performers in January after selling winners in December to create tax losses. This phenomenon pushes the stock market higher in the first month of the year.

Large caps tend to perform better this month. Small-cap securities have historically proven their outperformance in January. According to Ed Matts, founder of Matrixtrade.com, the S&P 500 has risen 1.8% on average in January since 1950 compared with a gain of 0.7% in other months.

In fact, January effect is expected to bring the bulls back in the market this year.

January Effect Seems Real in 2019

Volatility, which was on the forefront and weighed on stock market returns last year, has spilled over into 2019. The U.S. stock market started 2019 with a bumpy ride due to a government shutdown, U.S.-China trade spat and concerns over the health of the world’s second largest economy and its effect on global economy.

However, it recovered strongly in the third trading session of the year, following robust job data and Powell’s comment that the Fed is not in a hurry to raise rates this year. The American economy has added stronger-than-expected 312,000 jobs in December — the biggest gain in 10 months — while unemployment jumped to 3.9%, the highest rate since August.

The small cap index, Russell 2000, has gained 5.8% in the year-to-date timeframe, outperforming the major indices by a wide margin. In comparison, S&P 500, Dow Jones and Nasdaq Composite Index have gained 2.7%, 2% and 3.9% respectively.

Strong labor market coupled with higher wages, increasing consumer spending and rising consumer confidence have accelerated growth of the economy. Notably, the American economy is on track to expand at the fastest pace in 13 years. Against such a backdrop where the economy is booming but global concerns remain an overhang, small caps seem to be the perfect choice.

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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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