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Small Favors

A lot has been written about how well small cap stocks do in January. Yet I can’t seem to figure out what all the fuss is about. Yes, I’m aware of the “January Effect,” which states that small-cap stocks tend to do well in January after retail investors unloaded many of them in the prior year due to tax-loss selling. Indeed, many write about how small-caps even outperform large-caps in January. Yet history doesn’t support these conclusions.

  • Since 1979, small-cap stocks gained an average 1.69% in January vs. 1.04% during all 12 months of the year. Not bad. But it’s not the best, as April and December recorded superior price returns.
  • What’s more, January hasn’t produced the strongest one-month surge or the greatest single-month decline during the past 35 years either.
  • So if January is not the best from an average price performance perspective, maybe the “January Effect” refers to the frequency of price advances in January? Unfortunately, here too, other months have it beat.
  • Finally, maybe all of the hoopla about small-cap stocks in January has to do with how well they perform compared with large-cap issues. Here too January’s results were still not the best. Based on an average margin of price outperformance among those months that beat the S&P 500 more than 50% of the time, that distinction goes to February and December.

 

So, there you have it. Even though a lot is being written about the potential for small-cap outperformance this month, be advised that there are other months of the year in which small caps typically do even better. In fact, history concludes that the “January Effect” should probably be renamed the “Illumination Effect,” since January gets to bask in the glow of the surrounding months. December and February have been the two months in which small-cap stocks produced the widest margin of large-cap outperformance, not January. Yet January seems to get all the credit. So I guess it doesn’t matter which months shine the brightest, since it’s the month “between the beacons” that gets all of the attention.

Follow Sam on Twitter: @StovallSPGlobal

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