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January Almanac: Typical January Weaker Last 21 Years

January has quite a reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations has historically propelled stocks higher. January ranks #1 for NASDAQ (since 1971), but fifth on the S&P 500 and DJIA since 1950. January is the last month of the best three-month span and holds a full docket of indicators and seasonalities.

DJIA and S&P rankings did slip from 2000 to 2016 as both indices suffered losses in ten of those seventeen Januarys with three in a row, 2008, 2009 and 2010 and then again in 2014 to 2016. January 2009 has the dubious honor of being the worst January on record for DJIA (-8.8%) and S&P 500 (-8.6%) since 1901 and 1931 respectively. The early stages of the Covid-19 pandemic spoiled January in 2020 & 2021 as DJIA, S&P 500, Russell 1000 and Russell 2000 all suffered declines in 2020. In 2021, DJIA, S&P 500 and Russell 1000 declined.

As you can see in the chart above of the Typical January Performance over the last 21 years diverging market performance across the major indexes like we saw today is not unusual behavior during January in recent years. Since 2001, the S&P 500, DJIA, Russell 1000 and Russell 2000 have all declined eleven times in twenty-one years in January. DJIA and S&P have posted minor average losses while R1K and R2K have posted fractional gains.

Over the last 21 years, only NASDAQ has posted a full-month average gain of 1.0% up 12 of 21. All started January positive, only to surrender early-month gains by the end of the month. Weakness has historically accelerated just after mid-month, around the eleventh trading day.

In midterm years, January ranks near the bottom since 1950. Large-caps have been the worst with S&P 500 ranking #10 (third worst) with DJIA and Russell 1000 ranking #9. Technology and small-cap shares fare slightly better in the rankings, but small-cap average performance is still negative and NASDAQ is only barely positive.

On pages 112 and 114 of the Stock Trader’s Almanac 2022 we illustrate that the January Effect, where small caps begin to outperform large caps, actually tends to start in mid-December. Early signs of the January Effect can be seen when comparing iShares Russell 2000 (IWM) to SPDR S&P 500 (SPY) since around December 15. Historically, the majority of small-cap outperformance is normally done by mid-February, but strength can last until mid-May when indices typically reach a seasonal high.

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