In an earlier post today, I reviewed the thin evidence for the January effect as defined as a month that’s expected to shine with above-average returns. Debunking this idea still looks good based on the past 10 or 20 years, but it turns out that the numbers are even worse than I initially reported. In the previous post I mistakenly reported the sum of monthly returns for each monthly period—my apologies to readers. After correcting the error by computing the standard average of monthly returns (see the new chart below), I find that the January effect is even more elusive.
Here’s the updated chart showing the true average returns for the respective months over the trailing 10- and 20-year periods. There may be a January effect, but it’s not necessarily the one you’ve been expecting.
Some analysts say that the true value of the January effect is that it sets the tone for the year-ahead performance in the stock market. That argument is on stronger statistical ground, although it’s hardly a slam dunk. Details to follow shortly….