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THE HOLIDAYS MARK a festive period for stock market bulls. The final two weeks of the year and the first several trading sessions of January have historically seen unusually strong gains for the S&P 500 stocks, according to research from Bank of America. Since 1928, the final 10 trading days of December have averaged gains of 1.19% and the first 10 sessions of January have returned 0.72%.
Why has the S&P 500 performed well during this stretch? Increased holiday spending, a reversal of tax-loss harvesting and the anticipation of new money flowing into stocks come January are among the theories offered.
It’s no sure bet, though. Recall the last few weeks of 2018: The S&P 500 fell nearly 20% over a few months, culminating with big losses in December. Stocks bottomed on Christmas Eve that year and the usual pattern didn’t play out as many pundits expected.
Moreover, other so-called stock market anomalies have faded over time as the market becomes wise to temporary trends. The January Effect is a well-known Wall Street phenomenon in which small-cap stocks, such as the shares in the Russell 2000 index, post big gains during the first month of the year. But we haven’t seen that big outperformance by small-caps in recent years.
The good news: Investors like you and me don’t have to play these games. Sticking with a regular investment schedule is more prudent than trying to get cute with week-to-week return patterns. My advice: Forget timing the market and instead do something useful, like making sure your 401(k), IRA and health savings account contributions are on track heading into 2022.
