Years ago, a study in the Journal of Business of the University of Chicago a researcher named Sidney Wachtel found that stocks tend to go up more in January than in the other months – something dubbed the “January Effect”. In addition, over time, we have “learned” that markets tend to decline during the latter months of the year – particularly September and October. Right?
One would think the simple answer is to invest in late December and perhaps retreat to cash before September. The problem is that these things actually aren’t true — no month is statistically likely to produce an upturn or a downturn different from any other month. If something is not statistically significant, then it is considered a random event – essentially no different than a 50/50 probability.
If you don’t believe this, look at the accompanying chart, produced by OfDollarsAndData.com. It shows that the spectrum of returns over the past 98 years is very similar from month to month.
As is typical in finance, the so-called January Effect pretty much evaporated as soon as Wachtel’s article was published. Why? People started to invest earlier (in December) – bidding up stock prices – which had the impact of levelling out January returns.