January Effect Over the Long Run

Does long term data support belief in exceptionally strong performance by the U.S. stock market during the month of January? Could this conventional wisdom be an artifact of data snooping or a victim of market adaptation? Robert Shiller’s long run sample, which calculates monthly levels of the S&P Composite Stock Index since 1871 as average daily closes during calendar months, offers data for testing. Using monthly levels of the S&P Composite Stock Index for January 1871 through December 2011 (141 years), monthly closes of the S&P 500 Index for January 1950 through December 2011 (62 years) and dividend-adjusted monthly closes of iShares Russell 2000 Index (IWM) during May 2000 through December 2011, we find that:

The following chart shows the average return by calendar month for the S&P Composite Stock Index over the entire sample period, with one standard deviation variability ranges. The average return for all 1,691 months in the sample is 0.42%. At 1.53%, January has the highest average return of all months. January has the lowest standard deviation of returns (2.85%), so this high return is not compensation for high variability.

October is the only month with a negative average return (-0.37%).

Is this apparent January effect persistent across subsamples?

The next chart compares the average return by calendar month for the S&P Composite Stock Index over the entire sample period and three equal subperiods (47 years each). The performance of the stock market is consistently strong on average during January, and January is the best month for two of three subperiods. However, there is generally substantial variation in average returns by calendar month over the three subperiods.

For greater granularity and trend analysis, we examine relative performance during January by decade.

The next chart shows the outperformance of the average return for January relative to the average monthly return by decade over the entire Shiller sample period, along with a best-fit linear trend line. The trend line indicates that the magnitude of any January effect may be declining, but variability is large and sample size in terms of number of decades (14) is small.

For even greater granularity, we examine the effect by year.

The next chart shows the outperformance of the return for January relative to the average monthly return by year over the entire Shiller sample period, along with a best-fit linear trend line. The trend line again indicates that the magnitude of any January effect is declining. Outperformance appears to disappear, or even reverse, during the past two decades.

A plausible interpretation of the above results is that there used to be a somewhat reliable January effect, but the market has adapted to extinguish it.

Since the Shiller data calculates monthly index levels as average daily closes during months (perhaps representing typical investor experience) rather than monthly closes, we compare the above results to those for monthly closes of the S&P 500 Index.

The next chart shows the average return by calendar month for the S&P 500 Index over the entire sample period, with one standard deviation variability ranges. For this calculation, we approximate the January 1950 return using the opening level for that month (since no December 1949 close is available). The average return for all 744 months in the sample is 0.69%. At 1.12%, January has the fifth highest average return of all months, behind December, November, April and March. January has the second highest standard deviation of returns (4.80%), trailing only October.

Is performance during January persistent across subsamples?

The next chart compares the average return by calendar month for the S&P 500 Index over the entire sample period and two approximately equal subperiods (31 years each). During the first (second) subperiod, the performance during January is tied for third (seventh) place among the 12 calendar months.

For greater granularity and trend analysis, we examine relative performance during January by year.

The next chart shows the outperformance of the S&P 500 Index return for January relative to the average S&P 500 Index monthly return by year over the available sample period, along with a best-fit linear trend line. The trend line indicates that any outperformance during January disappears or reverses during the past two decades.

Might the January effect survive among small capitalization stocks?

The final chart shows the outperformance of the IWM total return for January relative to the average monthly IWM return by year over the available 11-year sample period, along with a best-fit linear trend line. Over this very small sample:

• The average monthly return for January is negative.
• January has the ninth largest average monthly return.
• The average monthly return for January relative to other months over the entire sample is -1.2%.
• The trend in January performance relative to other months is down.

In summary, evidence from long run data suggests that the conventional wisdom regarding outperformance of the U.S. stock market during the month of January derives either from snooping of an insufficient sample of older data or a real effect that the market has recognized and extinguished. Recent January returns are relatively weak.

Cautions regarding findings include:

• As noted, the monthly stock index level in the Shiller data is the average daily close during the month, and not the monthly close.
• Sample sizes, especially for IWM and S&P 500 Index subperiods, are small for inference.

See also “Turn of the Year and Size in U.S. Equities” for detail on recent behavior of U.S. stock indexes during January.