Breaking Down One of Wall Street’s Biggest Lies
One of the Wall Street claims that I hate the most is that January tends to be a good month for stocks.
It even has a name: the “January effect.”
It’s made up of poorly thought-out explanations. And it claims that investors and firms book end-of-year losses or gains in December, then buy back in January. In turn, stocks typically enjoy a strong (read: profitable) start of the year.
But this is false!
In all my years in the markets, rarely has this been true. And I’ve harpooned the January effect as complete nonsense.
So what’s the real story?
Thumbs-Down for the January Effect
Over the past 26 years, January has been one of the worst months for stocks!
It is one of only four months that have averaged a negative return during that span.
So don’t buy into the fake news that January is a great month for stocks. I’d wager that the people who parrot this idea haven’t done their research and are simply spouting a tired old wives’ tale that has no historical basis.
The fact is, the Dow Jones Industrial Average has ended January down 14 times since 1996.
That means stocks have exited the first month of the year with gains a mere 46% of the time! For those keeping score, that’s less than half the time.
Now, there are some strong performances, but they often follow a subpar December. For instance, that 8.4% gain in January 2019 came after a devastating 9.51% loss for the Dow in December 2018.
More importantly, we can see that the Dow has posted only two positive returns in January during the last eight years. And though 2017 was essentially flat at -0.04%, the rest of the losses were greater than 1.3%.
The reasons for this relate back to what we’ve been covering.
As we’ve highlighted recently, the markets historically end the year with a solid stretch of gains in October, November and December. After such a strong run, stocks need a breather. In turn, the Dow has averaged a 0.17% loss in January since 1996.
It is far from the best month for investors.
Over the last several months, I’ve maintained that investors need to look past the negativity and volatility and pay attention to the long-term trend.
Again, the trend is our friend.
The last three months of the year are routinely extremely profitable.
A holiday spending-fueled rally begins in October and pushes through December, leading to some of the best months of the year for stocks. And despite a turbulent end to November, since October 1, the Dow is up nearly 8%, the Nasdaq is up 11.2% and the S&P 500 has surged 9.2%.
That means that almost half of all of the indexes’ 2021 gains came in the final three months of the year.
The Dow gained 5.57% in October. The U.S. blue chip index ended November down 3.77% – the largest decline in the month since 2008 and the first negative monthly return for November since 2012. This was because the omicron variant and the Federal Reserve triggered widespread panic.
But it was fleeting, as the Dow finished December with a gain of more than 5%.
Here’s the deal: Each time we’ve seen a major slide in November, it’s been more than made up for in December.
And this is why we turn to these historical trends for guidance.
On to 2022
Regardless of economic conditions, macro issues or which political party is in power, we tend to see the same patterns hold true.
That’s not only comforting but also extremely profitable.
For a quarter century, the Dow and the other major U.S. indexes have more often than not finished the final three months of the year on a high note.
This was our guiding light throughout the whipsawing that took place at the end of November and the early sessions of December.
But as I outlined in November, we know those stretches tend to be emotionally delicate for investors.
2021 is in the rearview.
Now it’s on to 2022.
Unfortunately, the Santa Claus rally impacts only those few remaining days of December. The momentum rarely carries over into January…
Which means that the January effect is bunk.
On top of that, 2022 is the second year of the presidential cycle. I’ll cover this more in future articles, but with midterm elections, this year tends to be one of the worst in the four-year cycle for stocks.
So we’ve said our goodbyes to 2021. But we need to temper our expectations for January and for 2022 as a whole.
Here’s to high returns,
P.S. Happy New Year! Check out our 2022 market predictions by clicking here.
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