The January effect: what it is, and whether it still works
By Maya Koeva · October 16, 2026 · 7 min read
The January effect is the tendency of small company stocks to beat large ones in January. For most of the last century it was one of the strongest calendar patterns in the stock market: from 1927 to 1979, small caps beat large caps in 47 of 53 Januaries, by almost 7 percentage points on average.
The effect has faded. Since 2000, small caps have won about half of all Januaries, and in the last 11 they won only 4. The January 2027 trading month runs from Monday, January 4 to Friday, January 29.
What the January effect is
Researchers found that stocks returned more in January than in any other month, and that small companies earned nearly all of the extra return. Large companies had ordinary Januaries. Small ones, the smallest most of all, had their best month of the year, with a lot of the gain packed into the first few trading days.
People use the term two ways:
- The research meaning: small caps beat large caps in January. This page measures that one.
- The everyday meaning: the whole market rises in January. Some writers use "January effect" for that, but the original finding was about size.
Sidney Wachtel first described a January pattern in 1942. Michael Rozeff and William Kinney measured it in 1976, and Donald Keim showed in 1983 that close to half of the extra return small stocks earned over large ones in a whole year came in January alone.
The January effect by era
The numbers below compare the smallest fifth of US stocks by market value with the largest fifth, using the monthly size portfolios in the Kenneth French Data Library (Dartmouth), built from CRSP data through August 2026.
| Era | Januaries small caps won | Average January gap |
|---|---|---|
| 1927 to 1979 | 47 of 53 (89%) | 6.84% |
| 1980 to 1999 | 13 of 20 (65%) | 2.07% |
| 2000 to 2026 | 14 of 27 (52%) | 1.37% |
| Every other month, 1927 to 2026 | 497 of 1,096 (45%) | 0.03% |
The gap is small caps' January return minus large caps', in percentage points. Before 1980, January was a different month for small stocks: in the other 11 months they ran level with large ones. After academics published the pattern, the gap shrank in each era. Since 2000 small caps have won January about as often as you would expect from chance, and their average edge of 1.37 points rests on a few big years.
The last 11 Januaries
| January | Small caps | Large caps | Gap |
|---|---|---|---|
| 2026 | 4.14% | 0.93% | 3.21% |
| 2025 | 0.57% | 3.01% | 2.44% |
| 2024 | 3.73% | 1.92% | 5.65% |
| 2023 | 10.80% | 6.33% | 4.47% |
| 2022 | 8.42% | 5.56% | 2.86% |
| 2021 | 18.29% | 0.84% | 19.13% |
| 2020 | 4.70% | 0.48% | 5.18% |
| 2019 | 10.06% | 7.92% | 2.14% |
| 2018 | 2.75% | 6.16% | 3.41% |
| 2017 | 0.77% | 2.04% | 2.81% |
| 2016 | 10.12% | 5.17% | 4.95% |
Small caps won 4 of the last 11 Januaries. The average gap over those years comes out slightly positive, 0.15 points, but one month carries it: January 2021, when small caps gained 18.29% during the meme-stock frenzy that peaked with GameStop's short squeeze. Take that year out and large caps won the decade. In a typical recent January (the median), small caps trailed by 2.81 points.
Why the January effect happened
Researchers offer a few explanations. Two have the most support:
- Tax-loss selling. In December, investors sell stocks that lost money to claim the loss on that year's taxes. The selling hits small, beaten-down stocks hardest, since fewer buyers are around to absorb it. In January the selling stops, and the prices bounce back.
- Window dressing. Some fund managers sell small, risky losers before December 31 so their year-end holdings reports look tidy, then buy riskier names again in January.
Other explanations point to fresh January cash from bonuses and retirement contributions, and to small stocks being thinly traded, so a modest wave of buying moves them a long way.
Why it faded
Once researchers publish a calendar pattern, traders try to profit from it. If you expect small caps to jump in January, you buy them in December, and enough traders doing the same pull the gain into December until the January edge thins out. Cheaper trading, small-cap index funds and tax-aware investing that spreads loss harvesting through the year all cut into the old December selling too.
A 1980s investor who bought small caps in late December and sold at the end of January had a real edge. By the 2010s, the same trade was close to random, and in some years it lost money.
What the January effect means for you
For a long-term investor, very little. A seasonal edge that has shown up in about half of recent Januaries is no reason to shift your mix between small and large companies. Pick that mix for the long run and keep it through every month of the year.
If you trade around the turn of the year, a few points help:
- Sell losers for taxes by December 31. A tax-loss sale has to happen by the last trading day of the year, Thursday, December 31, 2026, to count for 2026.
- Mind the wash-sale rule. If you buy the same stock, or one substantially identical, within 30 days before or after you sell it at a loss, the IRS disallows the loss. After a sale on December 31, 2026, the first trading day outside that window is Monday, February 1, 2027.
- Expect noise in the first week. Small, thinly traded stocks can swing hard in the first days of January as tax selling ends and new money arrives. A jump in that week is a weak reason to buy.
January effect vs the Santa Claus rally
People mix up the two because they sit next to each other on the calendar. The Santa Claus rally covers the last five trading days of December and the first two of January, and it is about the whole market, usually measured on the S&P 500. The January effect covers the full month of January and compares small stocks with large ones.
A third idea, the January barometer, holds that the S&P 500's direction in January hints at the direction for the year ("as goes January, so goes the year"). The Stock Trader's Almanac groups the Santa Claus rally, the first five days of January and the January barometer as its January trifecta. None of the three is about small caps.
Common questions
What is the January effect?
The January effect is the tendency of small company stocks to beat large company stocks in January. Researchers documented it in the 1970s and 1980s, and most tie it to the end of year-end tax-loss selling.
Does the January effect still work?
Much less than it did. From 1927 to 1979 small caps beat large caps in 89% of Januaries. From 2000 to 2026 they won 52%, about what chance would give, and they won only 4 of the last 11.
When is the January effect?
It covers the month of January, with a lot of the historic gain in the first few trading days. In 2027 January trading starts Monday, January 4, because New Year's Day falls on Friday, January 1, and the month ends Friday, January 29.
What causes the January effect?
The leading explanation is tax-loss selling: investors sell losing stocks in December to claim the tax loss, pushing small stocks down, and the selling stops in January. Window dressing by fund managers and new January cash are the other common explanations.
Did the January effect happen in 2026?
Yes. In January 2026 the smallest fifth of US stocks returned 4.14% against 0.93% for the largest fifth, a gap of 3.21 points. In January 2025 small caps trailed by 2.44 points.
Is the January effect the same as the Santa Claus rally?
No. The Santa Claus rally is a seven-day window over the turn of the year, measured on the whole market. The January effect covers all of January and compares small stocks with large ones.
What is the January barometer?
The January barometer is the idea that the S&P 500's direction in January predicts its direction for the full year. It comes from the Stock Trader's Almanac and is a separate idea from the January effect.
Size data: value-weighted returns of the smallest and largest NYSE-breakpoint quintiles from the Kenneth French Data Library, built from CRSP data through August 2026. Past seasonal patterns do not predict future returns. Quantral surfaces signals and context from public sources to support your own research. Nothing here is financial advice or a recommendation to buy or sell.