The January Effect

Many have heard of January effect in stock markets - stocks generally go up in January. Here we take a look at this phenomenon and see if it still persists.

Below are the results for the S&P 500 for 1951 to 2018 using monthly simple percentage returns

It shows that while the mean return is indeed positive, there are many other months with higher mean returns. Might as well call it the January-and-March-and-April-and-July-and-November-and-December-effect.

What's more important is that the Sharpe of the other (Mar, Apr, Jul, Nov, Dec) months are higher.

The only advantage that January has is that it is the only month with a positive skew, albeit very slight.

Below are the return distributions for each month.

We are also interested in the smoothness of the equity curve, and whether the strategy is robust through time.

Below we can note the following observations:

  • The January effect lost its effect from 2000 onwards
  • Mar, Apr, Nov, Dec are remarkably good month
  • Sep is consistently bad
  • Oct (while having the reputation for worst declines) is still on a general up trend

In the next part, we will look at implementing a market timing strategy that invests only in certain months, and see how it fares against the benchmark.