(BFM Bourse) – Calendar effect less known than the “Christmas rally” or the “Mark Twain effect”, the January effect means that small caps outperform the heavyweights of the rating during the first month of the year. A phenomenon which is explained in particular by the “window dressing” of managers and the tax optimization of individuals.
Sensitive to the “Santa Claus rally” at the end of last year, investors are visibly less sensitive to the “January effect”, this other calendar effect according to which the equity markets climb more in January than in the other months of the year. , driven in particular by operators’ appetite for “smallcaps”.
This effect was spotted in 1942, when investment banker Sidney B. Wachtel found that, since 1925, small stocks had outperformed the market in general in January, with most of the disparities occurring before the middle of the month. .
How to explain it? There are several hypotheses but not really verified theories. The most common assumption is that individual investors, sensitive to income tax and who own disproportionately small stocks, liquidate some losing positions for tax reasons in December. Indeed, some individual investors choose to sell the shares that have performed less well over the fiscal year to take note of their loss and thus pay less tax. Even if it means then buying back the same shares to start again on a lower price in January. Especially in countries where losses can be carried forward over several years. But the January effect has been observed in countries where the fiscal year does not end on 31 December.
There is certainly therefore also a financial and psychological aspect with the passage of the New Year. At the end of the year, the expenses accumulate with the holidays. Some savers will therefore dip into their woolen stockings. Then, with the 13th month and the end-of-year bonuses, they will start saving and betting on the stock market in January. With a “good resolution effect” to take more care of its investments.
“The rebalancing of managers’ portfolios is another potential contributor to the January effect. Portfolio managers have been said to ‘dress their portfolios’ by selling riskier positions at the end of the calendar year, often companies capitalization, before reallocating these funds to equally risky securities (the famous “smallcaps” in particular) at the start of the year” explains John Plassard, Deputy Director of Investments at Mirabaud.
If the maneuver is similar to that of individual investors, institutional investors do not do it for tax reasons but for questions of appearance. This is what is called balance sheet dressing or accounts. This “window dressing” consists, for a manager, in embellishing his portfolio so as not to show the poor performances achieved during the past year, because this would have a bad effect vis-à-vis their potential clients. They therefore sell securities at a loss on the day when the composition of the portfolio is determined, and also buy securities that have outperformed the market, which they often already hold.
Portfolio rotation at the start of the year
“January is a month where we typically have a reversal of the trend compared to what we observed in December. In December, we exacerbate the trends of the year with what we calls for the facade, the “window dressing”. And as we had a very good month of December 2021, the start of the year 2022 is proving to be a little more difficult, especially for growth stocks. rotation, values, sectors and even regions because we have this “January effect” which is the mirror of the month of December” explains Jérôme van der Bruggen, head of investment strategy at the bank Degroof Petercam.
But what do the numbers say? In Challenges, the economist Mickaël Mangot had for example noted a clear outperformance of small caps in January in 6 developed countries as well as emerging markets over the period 1997-2013. France was the country where this difference was the most significant, with +3.7% on average for “small caps” against +0.3% for large caps. In the United States, this gap was much smaller: +0.4% for small caps against +0.1% for large ones.
There is also sometimes talk of a more global “January effect” on the markets. For example in the United States, over a long period, the shares of the S&P 500 would tend to rise in January more often than the other months of the year. But it all depends on the time period. If we rely on the calculator on the Moneychimp site, for example, the S&P 500 recorded an increase nearly 60% of the time in January (for the period 1950-2021), for an average increase of 0.94%. Still, the other 11 months of the year are in the green… also 60% of the time over the period. On the other hand, they show a lower average gain (+0.59%).
Finally, in recent years, this January effect seems to be fading in the United States, as shown by a study entitled “The January Effect Anomaly Reexamined In Stock Returns” published in 2016 in The Journal of Applied Business Research.
And this year for France? Since the start of the year, the CAC 40 posted a slightly negative performance on Monday around 2 p.m. (-0.30%), compared to +0.91% for the CAC Mid & Small.
Quentin Soubranne – ©2022 BFM Bourse