Image Source: Jeff Hirsch
Happy New Year!
So, today's post is about a stock market anomaly. An anomaly is an event that is different from what usually occurs. The oddity I'd like to discuss is something called the January Effect. The January Effect is an anomaly where small-cap stocks will outperform large-cap stocks. The trend begins in January.
Why would this anomaly happen? Generally, at the end of the year, fund companies will sell stock investments. Those investments which lost money are sold to get a tax benefit the following year. When money comes in from the sale of losing stocks, fund managers start buying new stocks in January.
So what type of stocks would fund managers buy? Small caps. Why? Small-cap stocks are generally associated with growth in earnings power. As earnings of a company grow, so too does its stock price, all other things being equal.
While this anomaly worked some 20 years ago, the defect has had little effect today according to author and investor Mark Hulbert. This note from author and investor Jeff Hirsch lists small-cap stock returns in January have been erratic as of late. The unpredictable nature of small cap stock returns in January is due to the anomaly being so well known among investors. When everyone knows a specific investment strategy, gains from the strategy start to falter.
The January Effect is having such a moment in recent years. Don't buy this strategy as investment advice. If your investment adviser mentions this strategy to you, ignore him or her! Stick to the tried and true methods of investing wisely. Watch for sales and earnings growth in industries whose returns have lagged. The returns should trail those of the stock market in the past couple of years.
Remember, what once has fallen, will soon rise again like a phoenix from the ashes.
Thanks for reading @ellofinance today. Your time spent here is much appreciated.