As all investors know, no two equities march to the same drum. This would then mean that, technically, it should be impossible to predict future returns based on readily available information. However, this might not be entirely true, as it turns out there may be something to be said for some seasonal investing patterns after all.
First off, when it comes to gathering statistics, there’s no better place to look than the stock markets. Monthly price data for equities on the New York Stock Exchange (NYSE) goes back to the early 1900s and data from the other indices goes back to their infancy. So it’s possible to gather objective data and weed out irregularities.
One of the most popular investing seasonal anomalies is the “January effect,” which really runs from late December to at least the end of February. The January effect theorizes that small-cap U.S. stocks have a history of outperforming the S&P 500.
The January effect was first observed by investment banker Sidney B. Wachtel and published in his paper “Certain Observations on Seasonal Movements in Stock Prices,” which appeared in The Journal of Business of the University of Chicago in 1942. In his paper, Wachtel shows that since 1925, small-cap stocks have outperformed the broader market in the month of January. (Source: Wachtel, S.B., “Certain Observations on Seasonal Movements in Stock Prices,” The Journal of Business of the University of Chicago April 1942: 15 (2); 184–193.)
Why is this? Most analysts theorize that tax-loss selling ramps up near the end of the year, when investors sell losing positions. Larger stocks can absorb the hit—but smaller stocks, not … Read More