Reverse lunch & the January effect

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Last week we were discussing the January effect: the idea that asset performance in January is a good guide to how the rest of the year will go. One thing’s for sure – January is a busy month for issuance and every dealing room wants to hit the ground running.

Some of the older members of the team (ahem) recalled old-school seasonal effects – year-end distortions in money markets, issuance cycles in credit, and how tax and fiscal calendars in the US and Japan used to move flows.

The vague memory was that markets often felt a little more “risk-on” at the start of the year but we are also aware of the academic view, that these calendar quirks should fade away as markets become more efficient. We suspect that the January effect is mainly an equity market phenomenon, confined to certain sectors, styles and regions (Sidney Wachtel, 1942).

So we decided to test it. We pulled 30 years of monthly data for a mix of major assets: S&P 500, Russell 2000, Nasdaq 100, US high yield, US Treasuries, gold and Brent crude. We then compared January returns with the average of the other eleven months. If January really is special, it should show up in the differences identified in our chart.

The results were… not what many of us would have expected.