January is usually a pretty strong month for stocks, suggesting that many could see large gains to start the year if historical trends hold true yet again. This is largely attributed to the “January Effect”.
What is January Effect?
January Effect is a historically observed increase in stock prices in the month of January due largely to year-end tax considerations. It is a seasonal anomaly in which investors redeploy their capital in the stock market in January after a sell-off in December to create tax losses. This phenomenon pushes the stock market higher in the first month of the year.
While large caps tend to perform better, small-cap securities have historically proven its outperformance in January. According to some market experts, the January Effect actually runs from mid December through February with the small caps continuing to outperform their large-cap cousins (read:Â 3 Best Performing Small Cap Sector ETFs of 2014). Â
January Effect Never Looked Better
While most of the developed and developing economies are now struggling to reinvigorate growth and fighting deflation in this fear-ridden world, the U.S. economy is growing at a faster rate not seen in more than a decade. Given this, small caps seem to be the perfect choice in the present scenario where the American economy is way ahead of the others.
This is because these pint-sized stocks are closely tied to the U.S. economy and generate most of their revenues from the domestic market making them great choices in a trending U.S. market. Further, these companies are small and are poised to grow higher than their already tapped out large-cap counterparts. These fundamentals will support the surge in the small-cap space going forward and the outperformance is likely to be more evident in the first month of the year if history is any guide.
For investors seeking to capitalize on the opportunity of the January Effect in basket form, the following small-cap ETFs and stocks could be solid pure play choices if it materializes in 2015 (read:Â all Small Cap ETFs here).
ETFs to Consider
While there are several options in the small-cap ETF space, we have highlighted those that have gained strong momentum last month and this trend is likely to continue in the first month of 2015 given their favorable Zacks ETF Rank of 3 or ‘Hold’ rating.
