The January Effect and What It Means for 2025

*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 9am ET, as our trading strategies educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.

Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session.

The January Effect refers to the historical trend where the S&P 500 and small-cap stocks tend to outperform during January compared to other months of the year. While this phenomenon has weakened in recent decades due to changing market dynamics, it’s still worth examining, as it provides insights into market sentiment and trader behavior.

Key Drivers of the January Effect

Small-Cap Outperformance:

Historically, small-cap stocks have shown stronger performance in January compared to large-cap stocks. This outperformance often stems from renewed buying interest at the start of the year.

Tax-Loss Harvesting:

At the end of the previous year, investors sell losing positions to offset capital gains, creating buying opportunities in January as they repurchase those positions.

Renewed Optimism and Fresh Capital:

January often brings fresh capital into the market from bonuses, new investment strategies, and the psychological “reset” that comes with the start of a new year. This optimism can drive buying activity, especially in long-only strategies.

While the January Effect was once a more reliable trend, its relevance has diminished in recent years due to several factors, including:

• Increased Market Efficiency: With more sophisticated tools and access to data, markets now react faster to seasonal trends, reducing their impact.
• Institutional Dominance: Large institutions dominate the markets today, and their fiscal years don’t always align with the calendar year, making their strategies less tied to January trends.
• Anticipatory Buying in December: Some of the activity traditionally associated with January now happens earlier, as investors try to front-run the January Effect by buying in December.

Despite these changes, the January Effect still provides valuable insights. Historically, January performance has been a reasonable predictor of the year’s overall market direction about 75% of the time. While this correlation has weakened over the past few decades, it remains a useful framework for gauging sentiment.

January 2025 has seen a mixed start, with some sectors rebounding while others remain subdued. Futures markets have hinted at optimism, with indices like the S&P 500, NASDAQ, and Russell 2000 showing gains early in the month. However, this momentum must be considered alongside broader market conditions.

One of the key narratives for 2025 is the potential impact of fiscal drag, where expected government spending cuts could weigh on economic growth. If this drag materializes, it could create a window of market weakness before the private sector steps in to offset the decline. This dynamic makes risk management and adaptability more critical than ever.

A related concept to the January Effect is the January Barometer, which looks at the first five trading days of January as a predictor for the month and the year. Historically, this tool has been about 70-80% accurate in forecasting annual trends.

This year, the barometer shows some early signs of strength, but external factors like geopolitical events and economic policy could quickly shift the narrative. It’s a reminder that while these seasonal trends provide context, they shouldn’t replace rigorous analysis and risk management.

For traders, the January Effect is more than just an academic concept—it’s a lens through which to view market sentiment and behavior. Even as its predictive power has waned, it remains relevant in helping traders:

• Identify seasonal opportunities, particularly in small-cap stocks.
• Understand broader market sentiment heading into the new year.
• Adjust strategies to align with current market conditions.

As we move deeper into the year, the January Effect reminds us of the importance of starting strong. Here are some key takeaways as you plan for the months ahead:

1. Pay attention to small caps: Historically, they’ve been early movers in January and may provide clues about broader market strength.
2. Watch for shifts in sentiment: The first month of the year often sets the tone for risk appetite and sector performance.
3. Stay flexible: Seasonal trends are helpful but not definitive. Always rely on your analysis and risk management principles to guide your trades.

The January Effect offers a fascinating glimpse into seasonal market dynamics, but it’s not a foolproof guide. As always, context is key. Use it as one of many tools in your arsenal, but don’t let it dictate your strategy.

As 2025 unfolds, I’ll continue to share insights on risk management, market conditions, and strategies to help you navigate the ever-changing trading landscape. Thanks for reading, and here’s to a successful trading year ahead!

Live Sessions (hereafter referred to as the “Content”) are produced by TradeZero. The Content may include the views and opinions of TradeZero and a third-party participant, Bob Iaccino. Bob Iaccino is compensated by TradeZero for participating in the Content. Mr. Iaccino’s trading experiences and accomplishments are unique, and your trading results may vary substantially from his. TradeZero is not responsible for and neither affirms nor endorses any of Mr. Iaccino’s views or opinions expressed in the Content. TradeZero makes no representations or warranties with respect to the accuracy of the Content or information available through any referenced or linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security.

Trading securities can involve high risk and potential loss of funds. Furthermore, trading on margin is for experienced investors and traders only as the amount you may lose can be greater than your initial investment. Likewise, short selling as a securities trading strategy is extremely risky and can lead to potentially unlimited losses. Options trading is not suitable for all investors as it can involve risk that may expose investors to significant losses. Please read the Characteristics and Risk of Standardized Options, also known as the options disclosure document (ODD) at https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document before deciding to engage in options trading.

TradeZero provides self-directed brokerage accounts to customers through its operating affiliates: TradeZero America, Inc. a United States broker dealer, registered with the Securities and Exchange Commission (SEC) and member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation(SIPC); TradeZero, Inc., a Bahamian broker dealer, registered with the Securities Commission of the Bahamas; and TradeZero Canada Securities ULC, a Canadian broker dealer, member firm of the Canadian Investment Regulatory Organization (CIRO) and member of the Canadian Investor Protection Fund (CIPF).