The January Effect

There have been a small number of consistent alpha-creating axioms in the U.S. stock market over time. Value beat growth over long time frames, tech stocks hit bottom in the summer and crowded trades separate you from your money, to name a few. None has been more consistent in my 40 years in the investment business than “the January effect.”

The January effect is very simple and logical. Stocks that perform poorly in the first ten months of the year get sold very heavily between October 15th and December 15th. Funds sell into an October/November fiscal year and accountants guide individuals to dump temporary losers to shelter existing gains and/or ordinary income. If you lost $10,000 on a short-term position, you would save 37% or $3,700 in tax in a match with a short-term gain of $10,000 in the highest marginal tax bracket. It would save $2,350 against $10,000 in long-term gains.

The weirdest thing happened in 2020. Virtually none of the major print or video media outlets wrote an article or did an exposé about the January effect. We didn’t see one in The Wall Street Journal or Barron’s or on CNBC or Bloomberg or new up-and-comers like Yahoo Finance. Nobody thought the topic was worthy. So, what did this cause? January 2021 is seeing the biggest January effect that we have ever seen, and it is having a huge impact on early year equity performance.

To get a real-world example, we will use the list of our stocks we wrote about in early November in a piece about cherry-picking names. We said that we had about 11 names that looked especially cheap, and in most cases, they had declined substantially from early in the year. The list looked like this, including the prices on November 1, 2020, and at the close on January 25, 2021:

(Click on image to enlarge)

Source: Bloomberg.

There has been a direct correlation between how poorly they had done from January 1, 2020, to November 1, 2020, to how well they have done since. In the absence of normal media and conversation, most investors seem astounded that something as historically reliable as the January effect has been so powerful.

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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