The 'January Effect' and Stock Market Seasonality

Key Takeaways

Everyone would like a tried-and-true formula for buying and selling investments. The quest for a “slam dunk” trading strategy keeps people trying to spot—and profit—from patterns that may have been observed at one time or another.

Seasonal market trends are patterns that seem to turn up with the flip of a calendar page. Let’s take a closer look at a few of these trends that have entered market lore.

What Is the January Effect?

The "January effect" refers to the perception that the stock market rises in January more than in any other month. Academics decades ago called attention to the pattern, and explanations for it have changed over time.

In recent years, tax-loss harvesting is the most frequent cause cited for the January effect. The theory is that after selling some of their stocks at year-end for tax purposes, investors look for buying opportunities in January. (Tax-loss harvesting activity typically picks up between October and December, although it's a year-round tax-mitigation strategy.)

Similarly, investors reengaging in the market and rebalancing portfolios after the holiday season may be another source of bullish January behavior. However, the record shows both good and bad Januarys for investing, with no statistically repeatable pattern to base a trading strategy on.

Sell in May and Go Away

The financial adage to sell stocks in May encourages investors to avoid the possibility of market decline over the summer and fall and then reinvest in November. The idea has some historical data behind it.

However, your account balance might be higher if you stay invested even through the market’s worst days. One of the most remarkable bull runs in market history began in March 2009 after the Great Financial Crisis.

It would be great if we could get out at the top of a cycle right before stocks experience a downturn and then jump back in just as prices go back up. But economic peaks and troughs are declared after they occur—and trying to time these events is more likely to have detrimental effects on investors.

The phrase sell in May is related to another seasonal market trend: the summer doldrums.

What Are the Summer Doldrums?

The tendency for market activity to slump from June through August dates back centuries when London bankers and merchants left the city and spent summer months in the country.

There is some modern-day merit to these so-called doldrums. The S&P 500 Index often experiences some of its lowest trading volume³ of the year at the height of the summer vacation season, from the week leading up to the U.S. Fourth of July holiday through the Labor Day holiday the first week of September. (Another dip usually occurs during the end-of-year holiday season.)

However, having fewer active buyers and sellers in the market around the major holidays is expected, and the lighter volume on its own is not meaningful.

Election Year Stock Market Seasonality

Another trend tied to the calendar is the U.S. presidential election cycle. Anyone paying even casual attention to the financial news hears that stock market volatility tends to increase during the run-up to Election Day and then decreases afterward.

Some investors might look at election year volatility and think they could gain something by trading out of markets around election time and getting back in later. However, our portfolio managers, with years of experience in the market, haven’t seen it as a winning strategy. They consistently state that election year market trends don’t affect how they select securities or make asset allocation decisions. That said, many investors, including retirement investors, don’t follow that practice.

Consider the 2024 election. Trading activity in 401(k) plans spiked over the first nine trading days of November 2024, according to employee benefits administrator Alight Solutions. Prior to the election, the firm noted investors shifting funds from equities to fixed income. However, as stocks soared on the outcome, money moved back into equities.⁴

Are Seasonal Stock Market Trends Your Friends?

Each of the trends discussed is based on a pattern observed at one time or another. But an observation is, by definition, past performance—which we all know doesn't guarantee future results. Most importantly, trading driven by seasonal market trends is a form of market timing, and no one can predict the optimal time for getting in and out of the market.

And data clearly show that getting the timing wrong—for buying or selling—can have a disastrous impact on your wallet.

You might say, the trend is your friend—until it ends.

So When Should You Buy Stocks?

My colleagues recently shared that “Should I buy stocks now?" is one of the most common questions we hear from clients. They explained that, while some people get lucky, no one has ever been able to reliably predict the best time for getting in and out of the market.

My team’s answer to the when-to-buy-stocks question is dollar-cost averaging. By consistently investing, in good and bad markets, you purchase more shares when stock prices are lower and fewer shares when they are higher—giving you the opportunity to lower your average investment cost.

Dollar-cost averaging can also help you stay invested during tough market conditions and may smooth the effects of volatility on your portfolio during turbulent times.

Where Do You Go From Here?

Markets can change quickly for several reasons, and it’s important to be comfortable with your plan and your emotions in the face of uncertainty.

We can help you determine what's appropriate for your needs, so you can be ready for what's ahead.