Source: Barron's Chinese
Author: Ian Salisbury

The data supports this strategy, but also indicates that its effectiveness has weakened in recent years. As for 2025, the driving factors behind last year's high returns in the U.S. stock market still exist, but there are also some concerns.

For a long time, investors have observed a phenomenon known as the "January Effect", where January is often one of the best-performing months for Stocks, especially Small Cap Stocks.

On Wall Street, there is a saying that "January is a good month to Hold Stocks", but the reality is much more complex; however, this does not mean that there are no opportunities in the market.

According to Dow Jones Market Data, since 1928, the average ROI for US Stocks in January has been 1.2%, compared to an average ROI of 0.6% in other months. One common explanation is that investors looking to avoid capital gains taxes often Sell Stocks that are below their current Market Cap at year-end to lock in tax losses and then buy them back in January of the following year, boosting their stock prices.

So, can investors take advantage of the "January Effect"? Data supports this strategy, but it also suggests that its effectiveness has weakened in recent years.

A recent study by Invesco on stock market returns found that from 1928 to 2000,$S&P 500 Index (.SPX.US)$The average ROI in January each year is 1.7%, which indicates that the 'January Effect' is indeed strong. However, the situation has not been the same in recent decades; from 2000 to 2023, the Index's ROI in January was -0.3%.

Since 1928, the average ROI in January for the S&P 500 Index is 1.2%, while the average ROI for other months is 0.6%.

Invesco found that Small Cap stocks exhibited the same dynamic. Between 1979 and 2000, the average ROI for Small Cap stocks in January was 3.2%, but entering the 21st century, the ROI in January for Small Cap stocks was only 0.1%.

Invesco concluded in its research report: 'Although the "January Effect" existed throughout the 20th century, its effect has significantly weakened in recent decades.'

However, investors can still benefit from the 'January Effect' by narrowing their focus. According to research by UBS Group, investors can directly focus on those Stocks that are sold to avoid tax losses and are then bought back.

The Institutions wrote in their research report: 'Over the past 35 years, S&P 500 Index components that fell more than 10% in a calendar year had an average ROI of 2.3% in the following January.'

Wolfe Research recently conducted a similar study, noting that during the period from December 15 each year to the end of January the following year, the average ROI of the 100 worst performing Stocks in the market tends to be about 2.5 percentage points higher than the Large Cap. The agency believes that this year, stocks expected to benefit include$Walgreens Boots Alliance (WBA.US)$and $Intel (INTC.US)$ 。

Another approach is to focus on Indicators. BofA Securities recently pointed out in a report that the "January effect" seems to have faded over the decades, but the agency found outperforming stocks among eight different Indicators.

BofA Securities' research results show that small-cap stocks with attractive valuations perform the best, based on factors like lower forward PE and lower sales to enterprise value ratios. Since 1989, small-cap stocks with attractive valuations have outperformed the Russell 2000 Small Cap Index by an average of 1.6 percentage points in January.

In contrast, among the eight Indicators studied by BofA Securities, momentum stocks performed the worst, lagging behind by 0.6 percentage points.

Will the 'January Effect' in 2025 bring returns to investors? The driving factors behind the high returns in the stock market in 2024 still exist, including continued growth in the USA economy and the large profits brought to technology companies by AI, but there are also some concerns.

The stock market performed moderately last December, indicating that investors have finally begun to worry about the issue of high stock market valuations. The upcoming inauguration of President Trump on January 20 adds an element of uncertainty, and Wall Street is trying to figure out what the priorities of the new administration will be. Early signs are not optimistic: Thursday (January 2) was the first trading day of the new year, $S&P 500 Index (.SPX.US)$ the market fell about 0.5% that day.

Editor/Rocky