Can Investors Bank On the January Effect?

Welcome to "The Informed Investor," where we break down the latest financial headlines, bringing you research and insights to help you separate the news from the noise. Welcome to "The Informed Investor," a show brought to you by Dimensional Fund Advisors, a global asset manager managing over $900 billion. Today's topic is Superbowl winners, sunspots, and other odd indicators that may give us some idea of what markets are going to do in 2026. I'm Mark Gochnour. I'm joined today by Jake DeKinder and Wes Crill, and you guys are loaded with all kinds of examples and little talking points here today. I like patterns. I like patterns in my clothes. Who doesn't? I sometimes get some criticism over some of the patterns I choose, but, you know, looking forward in financial markets is just right up my alley. You do have some pretty bold suits. Yeah, that's one way to put it. Yeah. All right, headline, first one here. "Is the January Effect Real or Just a Market Myth?" It's a myth. It's a myth? That's the end of the episode. We're done. Show's over? That was fun, guys. I wouldn't have brought any data, then. You don't need data for that one. Well, since you got it and you love patterns and you have data, myth? What do we think of the January effect? Well, it's something that, when we say January effect, what we mean is that it has been documented that small caps, relative return versus large caps, has been outsized in the month of January, so it's been substantially higher. It's not that it's not positive in some of the other months, but it is noticeably bigger in January. There's been various stories that are proposed. I don't know how many of them would actually hold up through time, especially across different markets. Like, why do we see this so strongly in the US? So, you know, again, I think it's a really good example of something that people might look at and say, "Okay, well, this is gonna tell me when I can expect a size premium." Well, that's not consistent with the market that is well-functioning, that is pricing expectations for the future, and if you could find something that was that easy of an indicator to observe and document and act on, that wouldn't make a ton of sense, and certainly doesn't square with the data we see around professional money managers. Yeah, I agree with that. I mean, look, if there's 12 months, one month's gotta be the highest. It just happens to be January. I mean, seriously, right? I mean, it's like if you look out there, I think maybe you're gonna show some stuff on companies that start with different letters, right? It's like, yeah, one of the letters has to be the highest, right? But does it really give you something reliable that you would want to sort of trade around, make financial decisions around? I think that's really the question. I was just gonna ask that. So you look, you say that maybe there are some months where, I guess it is, January may be a higher month for small cap stocks, but is it a reliable trading strategy if you were to follow it? Well, and if you only believed in the January month, I mean, you would still miss out on positive size premiums because other months have actually shown a positive size premium. Yeah, I look at all of these things. I mean, to Jake's point, you're gonna get weird stuff, especially when you have enough data points and a pretty noisy distribution. It kind of reminds me of, we have this really odd trend that's been persisting for about two decades in the NFL where the NFCE, so the division that has Washington, the Giants, the Eagles and the Cowboys has not had a repeat winner since 2004. Why does that happen? Is it just an especially fair division? No, I think it's just if you have enough bites at the apple with a lot of noisy trends, you're likely to find something that is purely spurious. Well, and that's what to remember about stock market data, is, I mean, you do the best you can. You look at the data, you come up with sensible explanations, but stock market data is noisy, right? If you have any massive data set and you start to analyze it, you're going to find patterns in there, and I think that's where you sort of have to be careful of, is it just a pattern that's interesting in the data or does it actually give you information on what you're supposed to do? I love your comment about one month has to be the highest of them. It's a pretty genius comment, I guess on. I'm not a research guy, but I do know that. Hey, you also find seasonality in some of these monthly returns, don't you? Like, sometimes they'll say, "Well, August may be a bad month for investing because people are on vacationing, particularly in Europe." They take the month off. I mean, what are you seeing there? There used to be an expression called sell in May and go away. The idea is, you know, starting in May, the next six months of the US stock market would be poor. These things don't really hold up in the data to a strong extent. It also doesn't make sense why you see it. If it's seasonality, if it's because people are going on vacation, no one's working hard in the market, well then, why would you see it in the southern hemisphere? And we actually see the same evidence there or some of the same trends, so I look at all of these as if it's that easy, then why wouldn't this get traded on to the point that it goes away entirely? Okay, now we're getting in a bigger point. Think about this, right? If people had this economic indicator, this trending indicator, this January, I mean, if you had that information, you'd never give that information away, and I think that's a bigger thing of you've got all these people that are just pouring over stock market data, looking for these patterns. If you had the secret sauce, you would not tell anybody about it. You'd go and you'd trade on it, you'd keep that information to yourself. So now you could look at some of the technical indicators that we may talk about, right? And now you're gonna give away this awesome technical indicator because you sign up for my newsletter for 20 bucks a month? No. No chance. No chance, nobody would do that. Price of "Above the Fray" is going up. From zero to something. From zero to zero. But you make an interesting point about patterns and why people look for these things in the first place. There's some interesting studies, right, where humans are almost given an advantage from an evolutionary standpoint if they can actually find patterns, and once upon a time our survival actually depended on it. Yeah, well, even if there's not a pattern there, but if you sort of operate that it's a pattern and I'm gonna take sort of the safer route, I'm like, what's the classic one that Ken French talks about about sort of being out on the Sahara and you see a lion or it could be a lion behind the bush, and he always jokes, he's like, "Whose genes reproduce," right? I think there is something evolutionary about human beings and our desire to sort of seek out patterns, and maybe it is from a survival standpoint. You mentioned football, and we're gonna look at some other indicators that are more economic-based. This one is not economic-based. You talked about football, so here's a headline here. "The Super Bowl Indicator: Can the Game Winner Predict How Stocks Will Do This Year?" And it's this, I think, well-published study now where if you go back in time to 1967, if the NFC wins, usually it's an up year in markets. If the AFC wins, it's usually a down year in markets. And Jake, this has been tough for you, because you're a Kansas boy. I am. So you're a Kansas City Chiefs fan. It's a tough year. But you want up markets too, so you're always a little, I don't know, split, I guess. You wanted the Chiefs to win but you wanted positive trends in the market. Maybe I'm just hedging my bets there, you know? Either I'm gonna be happy with the sports side or I'm gonna make money, one of the two. I'm worried about Mahomes, though. I know, I know. Any time somebody gets hurt. You don't want to see anybody hurt, but listen, KC had a great run, so it is what it is. Well, that great run has probably, in a funny way, sort of upended this relationship, because we did used to see that when the AFC won, it's followed by down market, but the last few years, we've had really strong market returns, and it coincided with a bunch of Kansas City Super Bowls, so maybe your team actually fixed the curse. It could be. Well, when that thing started coming out, didn't they have, like, 11 years of data that they were looking at? The article came out in the New York Times. It was a sports writer for the New York Times. It came out in 1978, I believe it was. So yeah, you're right, about 11 years of data. So let me, you got some data on this. I got some data on this, too. I guess I'll start here. So, let's go back to that time period. I mentioned it came out in 1978, and then from 1979 through 2000, a 22 year time period, that was correct 82% of the time. So you go back to, okay, that's some serious predictive value on that one. Okay, now you look at 2001 through 2024, and it was right 38% of the time. So I go back to, all right, if you look at that time period we were just talking about, '79 through 2000, I believe, what was it? It was like 13 years or something like that from the mid-80s through the '90s. The NFC won 13 years in a row. So, what I take from that is they are responsible for the incredible markets we had in the '80s and the tech boom in the '90s. Is that the way I should interpret it? I heard the N in NFC stands for Nasdaq, so this whole thing is just a conspiracy. No, I know the one thing you don't want to happen is for Miami to win the Super Bowl, because they've won two Super Bowls, both back in the '70s, and the year after that the S&P 500 did minus 15% after the first Super Bowl win, and the next one minus 26%. Now when they lost the Super Bowl, we had a huge bull market run, so you want them to get just close enough to the peak but not actually all the way there. I love that. Was it three data points, four data points? Four total data points. Four total data points. We had a joke when I was in grad school that theoretical physicists only needed one data point and that was good enough, and so I think four is probably in excess. All right, let's bring it back. Think about what you just told me about the Super Bowl. You told me it was 80% leading up to 2000 and 30%, so it works 50% of the time, is that right? It's about 50% of the time. Okay, great. And the other way, you know, maybe once the secret got out, then everyone started training on it. I find this stuff so funny. I find it so funny. All right, let's go back to some technical indicators here. I'm gonna read two headlines. The first one, this was in April, 2025. "The S&P 500 Death Cross Has Arrived. What Happens Next?" Now, let's just define that. We're not talking about church or anything related to that. Thanks for clarifying. We're talking about the 50 day moving average drops below the 200 day moving average, which is more of a bearish signal. So that article, let me read it again. "The S&P 500 Death Cross Has Arrived." That was in April, 2025. Now here's an article that came out in July of 2025. "The S&P 500 Just Saw Its First Golden Cross in More Than 2 Years. What Happens Next?" So, the Golden Cross is when the 50 day moves above the 200 day moving average, and that's more of a bullish indicator. So, it kind of cracks me up there. You have both of those within a couple months, but what do I make of something like that, when you have some of these technical analysis? I think this is all rooted in the perception that markets have to have a wax and wane or some sort of cycle associated with them. You know, we're used to observing that in nature, like whether it's caribou population, the tides, the phases of the moon. When you get to economic data where there can be some trending in things like GDP or inflation or interest rates, but when it comes to stock markets, that just doesn't hold up. You know, we don't see strong auto correlation in stock market returns. There's not a predictability based on what's happened in the past. And again, you wouldn't expect this to be the case, because if there is this level of predictability, that's not consistent with a well-functioning market, so I think that's really the challenge for investors, is you have to break that belief or that comfort level where you think everything has to be a cycle. With stock markets, it's just not that simple. I think it's even bigger than that. I don't think people like sort of operating under this view of things can just be random and just be chaotic. I think we want to make sense of our world. I really do, as human beings, and I think now you've got this massive data set with stock market data, you've got the ability to analyze it, you've got the ability to identify patterns, and I think there's a comfort element to that of okay, I can see X and it's going to mean Y, and that just kind of makes me feel a little bit better as a human being. I mean, you pull in the greed side of it and you can make some money off it, then you got another issue there, but to me, it's this bigger, we're trying to make sense of our world, and sometimes as an investor you just have to appreciate there's a randomness to the world and you get paid for kind of bearing that uncertainty. That, to me, is a little bit of what's going on with all of these technical indicators and signals and everything that people look for in stock market data. You know how I feel about this. I think everyone should have to take a quantum mechanics class so they get comfortable with the idea of randomness everywhere. It governs everything we observe at the microscopic level. It shouldn't be too surprising that we see it with the stock market level. Well, think about it. Let's go back to, like, astrology and zodiac signs and all, and you mentioned religion. I'm not getting into a religion discussion here, but I think through time, people have wanted to sort of say there's this unknown, I can't explain it, give me something that helps me make sense of it. I do think there's something going on here with these indicators that that's taking place. Jake, I don't know what quantum mechanics is. I don't, either. Okay, I was just making sure it wasn't me. No, are you kidding me? We'll put it in the show notes. There's a third of the things that Wes says, and I just politely nod. I'm like, "Yeah, that sounds good, man." There's a great movie about this, by the way, called "Coherence," where they actually get into some of the real world implications of quantum states. Fascinating. Sounds like it. All right. That was sarcasm, by the way. I figured. We've been doing this show for a little bit. I can tell when I'm getting made fun of. It's okay. I do agree with what you guys were saying, though, about this idea of we're sort of wired for patterns, whether it's survival, evolution, whatever it is. We want to say, "Hey, this is going to mean this," particularly when it comes to in this case, our investments, on that stuff. But you know, one of the things I have with looking at let's say a 40 day moving average or maybe 200 day moving average, is the future is unknown and uncertain, so why would it be that the prior 40 days somehow dictates what the future's going to be when we don't know what's gonna happen or what's not gonna happen? You may have crazy weather, you may have geopolitical stuff, you might have anything out there that can drastically change what might be happening in stock markets in this case, so that's where I've always struggled to say this will mean this. My brother, he used to, and maybe he still does, I don't know, but back in the day he'd play stock options, and his strategy was to buy two or three days before expiration. And one of the stocks he was looking at, this is probably 20 years ago, he's like, "Well, in the last two quarters, they had a pop, because their earnings were better than expected, so that's what they do." I'm like, "Okay, so that's gonna happen again one more time?" He's like, "Yeah." I'm like, "Okay, well, that's a strategy, I guess." It's an odd one to me. How'd that work for him? Yeah, we don't talk about it anymore. Okay. I have my doubts on the success of that one. Well, it's funny. You mentioned, you know, if you're looking at the moving average and what that implies about the future, so what do you do when this model tells you that the expected return is negative? Like, does that make a ton of sense, right? How can they expect a return on risky assets being negative? Well, I think there's another point there, too. You know, going back to, I think, the first one we talked about about the January indicator, but I think if you look at other months, you still have positive returns in those months, even if it's lower, even if we look at small cap, correct? And this, to me, gets at, it'd be, like, even if it's a little bit bigger or it's a little bit smaller, do you really want to miss out on that as an investor? Wouldn't you still want all of them in your portfolio? And I look at a lot of these indicators of, like, unless you can give me a strong signal that tells me the expected return is negative and I have to get out of the market, I still want to capture those returns. I go back to probabilities, and if you look historically, and we've referenced this so many times, but if you go back in time, the market's positive 70 plus percent of the time on a calendar year basis. Those are incredible odds. As an investor, man, I just kind of ride that one in terms of, if you're looking for things that can be successful over time. Do you have to play that game as an investor, right? You go through all of this stress, you look at all these technical indicators, you try to time the markets, you do all of that stuff and you just create so much havoc for yourself, versus just saying here's what the market's done all the time, it's a rock solid plan, just stick to it. Well, the havoc, the stress, and the consequences of getting it wrong can be really, really materially bad for families. Well, Jake, listen, you've got a couple other indicators that you're sort of favorites of as well. Walk us through a couple of those. Well, I think it was in the start when you kind of kicked off this broadcast, talking about this idea of sunspots. There's a great paper from Professor Robert Novy-Marx from a number of years ago where he goes out, and I think you count the number of sunspots and then maybe it tells you what the market return is over the subsequent 12 months, and it sounds ridiculous, but there's a correlation there, and I think that's what you've got to be careful of, of saying, "Okay, here's something I see in the data, and therefore I'm just gonna map it over and say, oh, it must be true." Yeah, it's so funny how many people have been confused by that paper and took it at face value and thought it was actually a serious recommendation about using that as an investment signal. I think it's consistent with, you know, we always talk about spurious correlations. There's actually a whole website called "Spurious Correlations" where they find random stuff that seems to move together. Like for example, if we look at pollution in Alaska, it's been highly correlated with the instance of Gerard being a name for babies. I don't think what that means is that if we get rid of our Gerard, it's gonna curb pollution in Anchorage. And then there's the other one that's probably a little bit darker, which is ice cream consumption and drowning deaths. Again, you know, it's probably ambient temperature. I don't think eating ice cream is actually gonna kill people, but you know, you see all these things in the data, and again, to the extent that human beings are looking for patterns. They might glom onto these. I think it just illustrates why you really want to be careful if you're making decisions solely based on noisy data. Noisy data. I mean, again, you've gotta have the theory on why you would expect to see it, kind of the logic, and then you've gotta have the data, the empirical to back it up. And so we go back to sort of stock market data, technical analysis, all the things we're talking about. You can't really fault these people, but the problem is just because you see it in the data, give me the story behind, and look, dimensional, what do we do here, right? We take massive data sets, we try to better understand them. Over time, what we've seen is that small should do better than large value, better than growth. I mean, it's in the data, right? But there's an economic theory on why you would expect that, and then we see it in the data, and we see it when you take it out of sample as well, right? Be very careful sort of saying I got a data set in one narrow market, and then I'm gonna extrapolate that maybe across all markets. It's a great way to think about any of these indicators. We all read about in various headlines and articles, data, economic story, and then what do they have out of sample, so great framework for that. By the way, you said our Gerard. Just for the audience, to be clear, that's Gerard O'Reilly, our co-CEO and and co-CIO. Yes, that Gerard. Jake, another one you often talk about is sort of the fear and greed index, you know, because emotions are real. Yeah. And maybe that drives sometimes returns in the market. Do we see anything there? Yeah, there's a fear and greed index on sort of market sentiment on where people are at right there. I think in mid to late December, it leaned a little bit more towards the fear side, but that's kind of funny when you think about it, this idea of, like, a fear and greed index. You know, when I hear that, what I think about is I think about a market, you know? If people were fearful, they might be more inclined to be sellers, and if they were a little bit more on the greedy side and they were optimistic, maybe they're gonna be buyers. I'm like, so just described a market where buyers and sellers come together to transact, because remember, every time someone's selling a stock, someone's on the other side of that thing buying it. Well, and to be fair, there is reason to believe that the expected equity premium changes through time partially because of this, because sometimes the market is maybe a little greedier and they're willing to accept a lower rate of return of whole stocks. At other times, maybe they are more fearful and they're demanding a higher rate of return. We certainly see evidence of this in the bond markets, where you can kind of see the changes in expected returns a little more, I guess, explicitly, whereas in the stock space, it's really hard to separate the expected return from expected future cash flow growth. But again, are these signals gonna actually help me identify periods of time where the expected equity premium is changing? Very unlikely. If anything, it's likely if I abide by these, I'm likely to miss out on a chunk of the equity. And you said it earlier. I mean, there's always a positive expected return. There's always people that are stepping in on the other side of that trade. I mean, look at trading volumes even when you get big drops in the market, right? There's plenty of buyers that are coming into that market, and they know there's a positive expected return for every stock and every market every single day. All right, so, you know, we've been talking a little bit about markets and some of the indicators we have on stock returns. I'm just gonna highlight a couple here around economic indicators that we hear about, and we don't have to spend much time on here, but I do want to get your thoughts on it quickly, which is things like this. We read about, "What Men's Underwear Sales Can Tell You About the Economy," or things like, "Recession Indicators: How Social Trends Like Lipstick, Hemlines, Champagne Sales," X, Y, Z, go on and on. So I guess on this one I'll give you my thoughts, and one of the reasons I like it is because it's sort of headline grabbing. It's something that seems very, I'll say tangible, meaning as shoppers, you're going out there and you spend less when times are tough, so you're gonna spend less on things like lipstick and champagne and new clothes and things like that. It seems pretty obvious to me, but the reason to be careful about that one is it's known information. When those sales are released, man, that stuff's built in prices instantly, and the market reacts to that instantly, so it's not as if it's telling you something necessarily about the future. It's already reflected in prices. So I just wanted to get your guys' thoughts on some things that may impact the economy on some of these different indicators, odd indicators, as we described it earlier. Yeah, I mean, this is why most of the economic indicators we look at, whether it's things that are more granular like that or just changes in GDP or inflation, none of them have been strong predictors of the stock market because, again, the stock market is forward-looking. Most of these indicators are backward-looking. So the market has already moved on, they've already reset prices based on whatever the expectations are for the macro economy. Now, if you have a deterioration in those expectations, you'll see an impact on prices. I mean, we don't have to look too far in the rear view mirror and go back to April when we saw, April of 2025, where we saw a big impact on market prices because there was a change in the expectations for the economy with the tariffs news. So, you know, absence something like that, if you're just reading a report of something the market probably already knows, it's not gonna help you get ahead. We did that episode, I think, back last summer, I believe sometime, or maybe last fall where we looked at a bunch of those economic indicators. You know, we looked at the level of debt, we looked at GDP growth, we looked at inflation, we looked at all of these things, and to Wes' point, if you're talking about it and you're thinking about it and you're sort of extrapolating that, hey, I've got this information and therefore I know what the market's gonna do, that's already baked into prices. Everybody knows that the US has a ton of outstanding debt. That is not new information. So looking at that to say here's where the stock market's going to go, it doesn't really tell you anything. All right, I'm gonna wrap up my favorite comment. Well, two favorite comments, I think, and both are Jake-related. Sorry, Wes. It's okay. Yes! I'll just hang out. The first one I loved you said was, "Hey, one month has to be the best." I just loved that one, that was great. And then the framework for any of this stuff is, again, look at the data, associate. There has to be an economic story there, and does it work at a sample, right? So I thought that was really well said, and it kind of sets up our next episode. We've been talking about things, you gave us some idea of what might be happening in the future with market returns. And listen, we're gonna get a ton of headlines about 2026 around the economy, how to think about the market, concerns, optimism, all of this stuff. So, that is going to be our next episode as we do look at the headlines going into 2026. So, thank you all for joining us today on "The Informed Investor." Be sure to check out the show notes, because we do have a survey there. We want to hear from you, what's working with the show, some of the things we can do differently, and we also want to get future topics that are on your mind that you'd like us to address. So, thanks again, everybody. Have a fantastic rest of the day.