January Effect Over the Long Run
Posted in Calendar Effects
December 29, 2008
Does long term data support belief in exceptionally strong performance by U.S. stocks in aggregate during the month of January? To check, we turn to the very long run dataset of Robert Shiller, which offers monthly levels of the S&P Composite Stock Index since 1871. Using monthly closes for the S&P Composite Stock Index from January 1871 through November 2008 (nearly 138 years), we find that:
The following chart shows the average return by month for the S&P Composite Stock Index over the entire sample period, with one standard deviation variability ranges. The average return for all 1,654 months in the sample is 0.4%. At 1.5%, January has the highest average return of all months. January has the lowest standard deviation of returns (2.9%), so this high return is not compensation for high variability.
October is the only month with a negative average return (-0.4%).
Is the January effect consistent across decades?
The next chart shows the average monthly returns for January, October and all months by decade over the entire sample period. The most recent decade (2001-2008) is, of course, partial. The average January beats the average month in 14 of 14 decades. The only decade for which the average January return is negative is the current (partial) one.
The average October underperforms the average month in 11 of 14 decades.
Does the January effect weaken over time?
The final chart shows the outperformance of the average return for January relative to the average return for all months by decade over the entire sample period, along with a best-fit linear trend line. Again, the most recent measurement is a partial decade. The trend line indicates that the magnitude of the January effect is declining, but the sample size in terms of number of decades is small.
In summary, a broad index of U.S. stocks exhibits noticeable and persistent outperformance in the month of January over the long run, but the effect may be diminishing.
