Calendar Anomalies

January Effect | Turn of the Month Effect | Monday Effect | Years ending in 5

Stocks in general and small stocks in particular have historically generated abnormally high returns during the month of January. According to Robert Haugen and Philippe Jorion, "The January effect is, perhaps the best-known example of anomalous behavior in security markets throughout the world." ¹ The January Effect is particularly intriguing because it doesn't appear to be diminishing despite being well known and publicized for nearly two decades. Theoretically an anomaly should disappear as traders attempt to take advantage of it in advance. Additionally, many have argued that some of the other anomalies occur primarily or entirely during the month of January (See Interrelationships). The bottom line is that January has historically been the best month to be invested in stocks.

The effect is usually attributed to small stocks rebounding following year-end tax selling. Individual stocks depressed near year-end are more likely to be sold for tax-loss recognition while stocks that have run up are often held until after the new year. Many believe the January effect has moved into November and December as a result of mutual funds being required to report holdings at the end of October and from investors buying in anticipation of gains in January. Some studies of foreign countries have found that returns in January were greater than the average return for the whole year. Interestingly, the January effect has also been observed in many foreign countries including some (Great Britain and Australia) that don't use December 31 as the tax year-end. This implies that there is more to the January effect than just tax effects. See also The Incredible Shrinking January Effect by William Bernstein.

Stocks consistently show higher returns on the last day and first four days of the month. Frank Russell Company examined returns of the S&P 500 over a 65 year period and found that U.S. large-cap stocks consistently show higher returns at the turn of the month. Chris R. Hensel and William T. Ziemba ² presented the theory that the effect results from cash flows at the end of the month (salaries, interest payments, etc.). The authors found returns for the turn of the month were significantly above average from 1928 through 1993 and "that the total return from the S&P 500 over this sixty-five-year period was received mostly during the turn of the month." The study implies that investors making regular purchases may benefit by scheduling to make those purchases prior to the turn of the month.

Monday tends to be the worst day to be invested in stocks. The first study documenting a weekend effect was by M. J. Fields in 1931 in the Journal of Business at a time when stocks traded on Saturdays. Fields had also found in a 1934 study that the DJIA commonly advanced the day before holidays. Several studies have shown that returns on Monday are worse than other days of the week. Interestingly, Lawrence Harris has studied intraday trading and found that the weekend effect tends to occur in the first 45 minutes of trading as prices fall, but on all other days prices rise during the first 45 minutes. ³ This anomaly presents the interesting question: Could the effect be caused by the moods of market participants? People are generally in better moods on Fridays and before holidays, but are generally grumpy on Mondays (in fact, suicides are more common on Monday than on any other day). Investors should however, keep in mind that the difference is small and virtually impossible to take advantage of because of trading costs.

In its existence, the DJIA has never had a down year in any year ending in 5. Of course, this may be purely coincidental. Unfortunately we have to wait till 2005 to see if the streak will continue.

This page is not a stand-alone page and should not be read or used without first viewing the main Anomalies page which includes important information and warnings about interpreting historical stock market anomalies.

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Last update 7/19/99. Copyright © 1999 Investor Home. All rights reserved. Disclaimer