The January Effect

Portfolio Gold Rush

Stock Market in the Month of January

January has historically been more positive than negative for the US stock market. In 2022, however, the S&P500 (SPX) benchmark index declined over 5% in the opening month. According to historical data trends and prominent sources such as the Stock Trader’s Almanac, January often sets the tone for the remainder of the year.

Since 1950, every red January has been followed up by increased volatility and an average return of -2.1% for the year. More importantly, the performance of S&P500 when taken from the January close to the low of the year is -13% on average between 1950-2020.

In simple terms, there are three implications here.

1. Long-term historical trends show that January is a strong month for equities on average.
2. A negative January for the S&P500 implies weaker yearly returns than average.
3. A red January usually means that volatility is expected to remain high on both sides of the market throughout the year, and whipsaw in both directions is common.

Now that we know about the January barometer, this can help for planning our investing strategies throughout the year. Of course it’s not an exact science and results do shift over time. For example, while long-term trends going back to the 1940s show that January tends to be one of the best months for stocks, the recent period from 2010-2022 has not borne that out. Over the period, January has finished red 60% of the time.

The other key factor here is that January-February tends to bring outperformance for small cap stocks – particularly in the resource sector. Gold, silver, uranium, lithium, and platinum have strong seasonal patterns between December and February. That means it’s generally a good time for producers and exploration companies, with stock prices often rising over the period.

Here’s some charts to back that up.

While historical trends can be used as a guide for the future, they should never be used as the sole basis for investment decisions. There are many other factors and frameworks to consider, such as returns are simply less impressive during bear markets than in bull markets for equities.

In years where the broader market performs particularly poorly, seasonal and defensive stock sectors tend to decline less than the broader range of assets and provide somewhat of a cushion for savvy investors.

On Friday we went over the S&P500 chart and the key levels for the upcoming months. It looks like the latter half of 2023 will be better for equities, and the first few months could be quite choppy. The exact timing depends on where we are in the economic cycle. Here’s a chart to show what I’m talking about.

Although the source article is from 2011, I find it a very worthwhile read.

Bottom line: The stock market leads the economic cycle by several months based on future expectations. As the western world plunges deeper into a recession throughout 2023, stocks and risk assets like crypto may catch a bid before we see the worst of the real-life economic impact. It’s always good to start the year on a positive note!

Jay Charles

Editor in Chief, The Trading Tank.

Disclaimer: The publisher does not guarantee the accuracy or completeness of the information provided in this page.  All statements and expressions herein are the sole opinion of the author.

The Trading Tank is a publisher of financial information and not an investment advisor. We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient. 

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY OR PUBLICLY TRADED ASSET DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.