Can Investors Bank On the January Effect? | The Informed Investor 27

Episode 27: Do small capitalization stocks typically outperform in January? If so, can investors capitalize on that pattern?

This trend is known as the January Effect. It's a popular idea because historical data show a sizable small cap premium versus large caps in January.

Still, that's not a reason to avoid small cap stocks in other months, assuming you want to own them. Why not?

Two reasons: (1) Nobody really knows why this "January Effect" exists—or whether it will continue, and (2) small caps, in general, have higher expected returns.

Welcome to the wild world of odd stock market indicators, few of which seem to offer sensible investing signals.

Another popular one is the Super Bowl Indicator: The winner of the Super Bowl supposedly determines how the stock market will perform that year.

Silly idea, obviously, because this widely followed signal suggests that the market will deliver a positive return only in years when the NFC champion wins.

There isn't any academic or logical explanation for this indicator. But since the correlation between the Super Bowl winner/loser and market returns appeared to be perfectly accurate when the indicator was first identified in the late 1970s, people started believing it.

They probably should stop believing. In the 21st century, the indicator's success rate is 38%.

Technical analysts also look for signals in data like moving averages, often referencing something called a "Golden Cross" or a "Death Cross" in a stock index. The former is when the 50-day moving average crosses above the 200-day moving average; the latter is the opposite.

(A moving average is a constantly updated average price or level.)

The S&P 500 experienced both a golden cross and a death cross in 2025. Which signal, if any, was right?

The same question applies to all of these strange indicators … and others like men's underwear purchases, hemline lengths, and even sunspots.

In Episode 27 of The Informed Investor, Dimensional's Mark Gochnour, Head of Global Client Services, Wes Crill, PhD, Senior Client Solutions Director, and Jake DeKinder, Head of Client Communications, scrutinize the data and try to determine whether investors can benefit from any of these so-called signals.

LINKS FROM TODAY'S EPISODE:

The Informed Investor: Feedback Survey

https://www.dimensional.com/us-en/informed-investor-survey

The Informed Investor, Episode 3

"Debts, Deficits, and Investing"

https://youtu.be/AK66PrRFBTU?si=W5gJ-thCErETX7kV

The Informed Investor on YouTube https://www.youtube.com/playlist?list=PLCyJr6FFig-h1mA7rVP7Mbk0irFw2wA90

Dimensional Fund Advisors Shorts on YouTube https://www.youtube.com/@dimensionalfundadvisors/shorts

Mark Gochnour on LinkedIn https://www.linkedin.com/in/mark-gochnour-9a23598a/

Wes Crill on LinkedIn https://www.linkedin.com/in/wes-crill-77a49417/

Jake DeKinder on LinkedIn https://www.linkedin.com/in/jake-dekinder-cfa-4105b98/

Learn more at https://www.dimensional.com/