Abstract
The January effect exhibits a pronounced declining trend for both large and small firm stock indices since 1988 and the effect is disappearing for the Russell indices. The declining trend is also evident in the Dow 30, since 1930. While the trend is upward for the Dow 30 and the S&P 500 for the post-war period through the 1970s, because of the extremely high January returns in 1975 and 1976, the trend lines are flat when these outliers are excluded. The downward trend is more apparent for indices containing small stocks than for indices of large stocks. The January effect is negatively connected to actual and expected real GDP growth, inflation, and return of the year, and it is positively related to volatility. The power ratio method provides a consistent way to reveal the relative contribution of January return in the year. Finding the pattern of changes in the anomaly has implications for investment strategies.
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