the January effect …or lack of it

The traditional “January effect” in the US stock market, discussed to death in academic finance, is the tendency of sketchy small cap, low share price stocks to bounce strongly during the opening few weeks of the calendar year. That’s mostly because this kind of walking-disaster name tends to attract not so savvy risk-seeking retail investors. They aggressively sell such stocks in December to recognize the losses they’ve racked up so they can get an income tax deduction. The “bounce” is less enthusiasm for the names and more recovery from the downward pressure exerted on them in December.

Historically, there’s also been a (less important) tendency for taxable investors of all stripes to nurse winners they intend to trim or sell into January to defer paying income tax for another year. The increased importance of mutual funds/ETFs and index investing has pretty much put an end to this behavior, although it wouldn’t surprise me if this temporary market pressure returns, as the brokerage industry begins to court a new generation of individual stock buyers.

What I’m noticing so far this January are the developments that are not evincing any reaction on Wall Street. This has to do with the strong outperformance of the Russell 2000, a proxy for smaller businesses focused on the domestic economy, vs. the S&P 500, half of whose earnings come from abroad.

Two distressing recent developments:

–covid cases are mushrooming, to the point where Los Angeles is reported to be instructing ambulances not to bring patients to the hospital who are unlikely to survive

–Trump’s attempts to overturn the election results, which sound like something straight out of the old Soviet Union. There’s the tape of Trump tying to coerce Georgia into falsifying the voting results in that state and there’s the statement form formers Defense secretaries warning of possible criminal prosecution of military commanders who follow orders to use troops to intrude into the election process. The latter suggests Trump may also have made Georgia-style calls to generals. More shockingly, a significant number of senators and representatives have rallied behind Trump in this effort.

The investment point? …the Russell 2000 continues to outpace NASDAQ and the S&P, signaling Wall Street’s belief that none of this will have a negative impact on the domestic economy or on investors’ continuing willingness to prefer domestic to multinational names.

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