Is the January effect real?

What is the January effect?

The January effect is the belief that small stocks beat large stocks in January, above all in its first few trading days.

The usual story is taxes. People sell losing small stocks in December to book a tax loss. In January the selling stops, and small stocks bounce back.

Academic studies made it famous in 1983.

What exactly did we test?

We pitted the smallest tenth of US stocks against the largest tenth, sorted by market value. We tested three claims.

That gave us 100 Januaries against 1,101 other months, and 100 first-five-day windows against 5,124 ordinary five-day stretches, from July 1926 to August 2026.

Until the timing example, every number is a gap: small stocks' return minus large stocks' over the same days. Gaps between gaps are in percentage points, or points.

Do small stocks really win in January?

Yes over the century: small stocks beat large stocks by +6.1% in an average January, but by just +0.8% in the last 20 years.

In an ordinary month, large stocks were slightly ahead: -0.1%. Small stocks beat large stocks in 78% of Januaries, against 46% of ordinary months.

The chart shows each group's own average; January's extra lead, our main number, is the gap between the bars.

Over the century that extra was 6.2 points, with a likely range of +4.6 to +7.9 points. It held in both halves: +9.1 points and +3.2 points. January's own lead over large stocks, +6.1%, has a likely range of +4.5 to +7.8 points.

In the last 20 years (Januaries 2007 to 2026), January's lead over large stocks was +0.8%. An ordinary month's gap with large stocks was -0.4%, so January's extra lead was +1.2 points.

Are the first days of January the big ones?

Yes, a big part of January's lead comes in its first five trading days. Small stocks beat large stocks by +3.2% over those days, against 0.0% in an ordinary five-day stretch.

Small stocks beat large stocks in 87% of those windows, against 48% of ordinary stretches. The gap of 3.2 points has a likely range of +2.6 to +3.9 points, and held in both halves, at +4.7 points and +1.7 points.

January's first trading day averaged +1.15% and December's last +1.02%; in the last 20 years, +0.38% and +0.41%.

In the last 20 years, small stocks beat large stocks by +1.0% over those days, against -0.1% in ordinary stretches: an extra of +1.1 points. They beat large stocks in 55% of 20 windows, against 47% of ordinary stretches.

Did it shrink once it became famous?

Yes, a lot: January's extra lead over large stocks fell from +8.6 points up to 1983 to +1.2 points in the last 20 years.

Since 1984, that extra lead over large stocks was +2.9 points, with a likely range of +1.3 to +4.7 points. For the first five days, the extra over large stocks went from +4.3 points to +1.8 points.

Small stocks beat large stocks in only 50% of the last 20 Januaries, about as often as in an ordinary month (47%).

One story is fame: traders may now buy earlier.

Why still MATH? Our rule needed a likely range above zero overall, and a gap above zero in both halves and the last 20 years. It passed, the recent check only just. Over the century it's real. In the last 20 years it's small, and with only 20 Januaries it could easily be luck.

Why do we weight by size?

Weighting by market value is closer to what a small-stock fund could own. We chose it before seeing any results.

The studies that made the effect famous counted every small stock equally, however tiny. Averaged that way, tiny stocks' daily returns come out a bit too high, worst at the turn of the year.

Counted their way, the gap is bigger. January's extra lead was +9.1 points, and +4.4 points in the last 20 years. For the first five days it was +4.7 points, and +2.9 points in the last 20 years. It shrank less that way, but still a lot.

Does it hold everywhere?

Not evenly: over the century it lived mostly in the very smallest stocks, but the last 20 years don't follow that pattern.

In the last 20 years, the second to fifth tenths had none of January's extra lead. The seventh tenth had +1.1 points, about as much as the smallest tenth's +1.2 points over large stocks.

With the smallest three tenths against the largest three, it was +3.6 points, and -0.3 points in the last 20 years. With fifths, +4.5 points and +0.1 points. So the small recent gap may not be about size at all.

Our industry check doesn't fit a race between small and large stocks, so this MATH passed one check fewer than our other calendar verdicts. The size data are US only, so there's no check in other countries either.

What does this mean for you?

This is history, not a forecast. MATH isn't a reason to buy small stocks every December, and a smaller effect is no reason to do the opposite.

Take a timing example: small stocks in January, large stocks otherwise. It mostly holds large stocks, so holding large stocks all year is the comparison.

Over the century it pulled ahead: +15.5% a year in total return, against +9.7% for large stocks. Small stocks all year grew +11.7% in total return, and the whole market +9.9%.

In the last 20 years it was about level: +12.5% a year in total return, against +11.9% for large stocks. Small stocks grew +7.1% and the market +11.5%, in total return.

Always in stocks, its worst fall was -73.9%, against -82.5% for large stocks, -89.5% for small stocks and -83.9% for the market.

In the last 20 years the worst falls were -53.0%, against -52.7% for large stocks, -66.5% for small stocks and -54.7% for the market.

Its total return a year was +15.7% with no costs, +15.1% at a quarter of a percent per switch, and +14.6% at half a percent. In the last 20 years: +12.6%, +12.1% and +11.5%.

Real costs in tiny stocks can be higher still, and these are before taxes. With a recent tie, that's no recommendation.

What else did we test?

See all the calendar effects we tested, or how we test a myth.