The Investment Scientist

The January Effect: What Does It Bode For The Market in 2023?

Posted on: January 31, 2023

“The January Effect” refers to two phenomena in the stock market that elude good explanation: 

  1. The market tends to perform exceptionally well in January.
  2. The market’s January return tends to predict the rest of the year. That is, if we have a good return in January, it is more than likely that we will have a good return for the whole year.

In recent years, however, people have been saying that the January Effect is weakening. So today I am going to revisit these two phenomena using the S&P 500 return data from the last 10 years. In the table below, I calculated the January returns (and the annual returns) from 2013 to 2022 and arranged them from the lowest to the highest. 

Here are my observations:

  1. The market had negative returns in five of the last ten years. The average January return was only 0.74%. So the first supposition of the January Effect, that the market performs exceptionally well in January, did not seem to hold over the last ten years.
  2. However, the second part of the January Effect seems to still hold very strongly. In the years that the January returns were negative, the average annual return was only 6.02%. But in the years that the January returns were positive, the average annual return was 17.10%! 

So far this year, the January return has been 5.39%.  What do you expect the full-year return to be?

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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