Seasonality, the January Effect, and the Russell 2000

Please note: following is a discussion of certain seasonality phenomena that you might find interesting, but past performance is nor indicative of future returns, and this does not constitute a recommendation to buy or sell at any time - for investment advice please check with your financial advisor.

The "January effect" refers to the phenomenon in which many securities, and particularly stocks of smaller companies, have enjoyed higher rates of return in January than in any other month. The effect was first suggested in 1942, and widely publicized in the past 25 years by scholarly articles and a popular book entitled The Incredible January Effect: The Stock Market's Unsolved Mystery, by Robert A. Haugen and Josef Lakonishok. From 1926 through 1989, the smallest 10% of all stocks (or "10th decile") beat the rest of the market by an average of 9.4 percentage points in the month of January. Perhaps due in part to publicity and anticipation of the effect, the effect weakened slightly in the 1990s, but small stocks still outperformed by an annual average of 5.8 percentage points.

There are a number of theories as to why the January effect has occurred. Some people speculate that it may be related to the many year-end research reports on the small-cap market, which can make these stocks look like attractive places to put money. Another theory says that investors who need cash for the holiday season will sell some holdings; bargain hunters then swoop in to buy the sold-off shares. Others believe the effect may be related to tax-motivated selling and buying -- fund managers might rush to buy back all those money-losing stocks they had previously sold to meet the tax-loss deadline. See the bibliography below for more details.

Bibliography of Articles on Seasonality and the January Effect

Ball, R., S.P. Kothari, and J. Shanken, "Problems in Measuring Portfolio Performance: An Application to Contrarian Investment Strategies," Journal of Financial Economics (May 1995), 79-107.

Bhabra, Harjeet S. et al.; "A November effect? Revisiting the Tax-loss-selling Hypothesis." Financial Management (Winter 1999)

Chen, Honghui, and Singal, Vijay. "A December Effect with Tax-gain Selling?" Financial Analysts Journal. (Jul/Aug 2003), pg. 78.

Chopra, N., J. Lakonishok, and J.R. Ritter, "Measuring Abnormal Performance: Do Stocks Overreact?" Journal of Financial Economics (April 1992), 235-268.

Haugen, R.A. and J. Lakonishok, The Incredible January Effect: The Stock Market's Unsolved Mystery, Homewood, IL, Dow-Jones, Irwin (1998).

Hulbert, Mark. "Why Small-Cap Stocks Are So Hot in Cold Weather." New York Times. (Nov 18, 2001).

Jones, S.L., W. Lee, and R. Apenbrink, "New Evidence on the January Effect before Personal Income Taxes," Journal of Finance (December 1991), 1909-1925.

Keim, D.B., "Size-Related Anomalies and Stock Return Seasonality: Further Empirical Evidence," Journal of Financial Economics (June 1983), 12-32.

Lakonishok, J. and S. Smidt, "Volume for Winners and Losers: Taxation and Other Motives for Stock Trading," Journal of Finance (September 1986), 951-974.

Maxwell, W., "The January Effect in the Corporate Bond Market: A Systematic Examination," Financial Management (Summer 1998), 18-30.

Opdyke, Jeff. "Only Three Weeks Left To Fix Your Portfolio --- Stock Losses Hit a Record This Year, but December May Be the Time to Buy; the Real 'January Effect.'" Wall Street Journal. (Dec 11, 2002). pg. D.1

Pradhuman, Satya Dev. Small-Cap Dynamics: Insights, Analysis, and Models. 2000.

Riepe, Mark W. "The January Effect: Not Dead Yet, but Not at all Well" Journal of Financial Planning v. 14 no1 (Jan. 2001).

Roll, R., "Vas Ist Das? The Turn of the Year Effect and the Return Premia of Small Firms," Journal of Portfolio Management (Winter 1983), 18-28.

Stires, David. "Cashing in on the January Effect." Fortune (Nov. 27 2000).

Wachtel, S., "Certain Observations on Seasonal Movement in Stock Prices," Journal of Business (April 1942).

Yanxiang Gu, Anthony. "The Declining January Effect: Evidences from the U.S. Equity Markets." Quarterly Review of Economics and Finance. (Summer 2003) pg. 395.

Zweig, Jason. "New Year's Play". Money (Dec. 2000)

About Russell Indexes

Russell's index business began in 1984 as a way to accurately measure U.S. market segments and better track investment manager behavior for Russell's consulting and investment management business. The resulting index methodology produced the broad-market Russell 3000® Index and introduced the first small cap benchmark - the Russell 2000® Index. Russell applied the same methodology in 2007 to design the Russell Global Indexes.