There are only six more stock shopping days until the new year and the onset of the annual surge in small company stocks known as the "January Effect."
Does that mean you should spend these last precious days stocking up on shares of small companies?Well, Roy S. Jespersen, a portfolio manager at Salt Lake City-based investment firm and mutual fund group Wasatch Advisors Inc., won't go out on that particular limb, but he does allow that he and his associates find the January phenomenon "very interesting," albeit not an integral part of Wasatch Advisors' investment process.
Jespersen said analysts are speculating that next month's January Effect could be the most pronounced in four years, mainly because small company stocks were so beaten down this year. For example, Fidelity Investments' Small Cap Stock fund is down 5.45 percent for the year.
That the January Effect exists is well documented. Is there any rational basis for it? Jespersen says part of it is due to investors selling their "losers" for tax losses in December to offset the gains on their winning stocks. This brings down the price of the losers even more, sometimes excessively, which creates "bargains" that are then snapped up at the start of the new year.
Jespersen says this "rebound" is especially significant on thinly traded issues.
Interestingly, the January Effect has its counterpart in Australia where the tax year ends June 30. Down Under it's known as the "July Effect."
There is also, says Jespersen, the practice known as "window dressing," in which institutional investors try to improve the look of their clients' portfolios "by getting rid of their dogs and starting the new year fresh."
There is no shortage of investment omens, of course. Everything from the outcome of the Super-bowl to the length of women's hemlines are regularly cited as infallible proof as to the direction the market is headed.
But the January Effect is probably more reliable than most such exercises, notes Jespersen. Data going back to 1950, as compiled by Ibbotson Associates of Chicago, show that in January (and February as well) small stocks have easily outperformed the shares of larger and better known companies.
During that 44-year period, January had an average gain of 7.3 percent in small company stocks, vs. a 2.6 percent rise in the Standard & Poors 500 largest companies.
In February, small company shares gained an average of 2.4 percent in February, compared with a 1.8 percent rise in the S&P 500.
Small stocks have beaten larger ones in both January and February in eight of the past 10 years.
Massachusetts-based Ned Davis Research Group compared the performance of the Over-the-Counter Composite Index, which trades only small company stocks, with the S&P 500 for the period 1979 to 1993 and found that:
- The first week in January provided the largest gains;
- The last week in December provided the second largest gains;
- By the second week in January, 88 percent of the January Effect was over.
If it sounds simple to cash in on the January Effect, that's probably an illusion. Jespersen points out it is not that easy to call the bottom of the tax selling run, and a "cheap" stock is not always a "good" stock.
"You still have to do your homework and buy undervalued stocks selectively," he says.