The Arbor Outlook: Winter, SAD and the January Effect

"Ain't it foggy outside... all the planes have been grounded; Ain't the fire inside... let's all go and stand around it."
—from "Sandman" as performed by America

All four of our seasons enthrall me. Sometimes, though, I love winter just a little less than the others.

Days are shorter. Outdoor activities take a backseat to indoor gatherings. Last year's national winter flu epidemic was historic. More folks pass away in winter than in other seasons, especially older citizens. There's even an illness associated with winter and decreased sunlight and lowered serotonin levels: Seasonal Affective Disorder (SAD).

So why do stock prices traditionally increase in January, right in the heart of cold, depressing weather? Or does the January Effect actually exist?

One reason stocks have risen in January is because there's often been a drop in December prices, as investors and advisors frequently perform tax-loss harvesting to offset realized capital gains. This selling can cause a drop in prices, and January's buying returns them to normal. Some also believe that investors often employ year-end cash bonuses into the market in January, and this can cause prices to rise.

Some even believe that January is a "new beginning" for many investors, and the month benefits from financial resolutions associated with the New Year. A study which analyzed stock prices from 1904 to 1974 noted that the average return for stocks in January was five times that of any other month, and that this was especially true for small cap stocks.

That said, the impact has lessened over the last several decades; so much so, that some economists believe that the cost of transactions negates the possible small gain associated with purchasing stocks in January. Another concern is that stocks that rise in January may not hold their value in other months.

There's an urban legend that if you buy in January and sell in May (sell in May and go away), you'll profit every year. Here we arrive at the heart of investing strategy, which begs the answer to two questions. One, what do you want this money (your investing dollars) to do for you, and two, when will you need it? If you want your investment dollars to make a small, extremely short-term profit, one that you'll capture in four months, the January Effect might interest you. But a seasoned investor with a longer time horizon won't be lassoed into this type of thinking.

Say you're 65, and plan to retire at age 70. You want your assets to grow, and possibly produce income along the way if you need it. And you want to begin using the money at retirement. This is a plausible, common scenario. You've got a five-year time horizon. So what stocks do month to month is not your major concern.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.