Over the past 90 years, the S&P 500 index has risen an average of 1.2% in January, according to Yardeni Research, making it one of the best-performing months for investors.
Investing pros even have a term for the market's tendency to rise at the start of the new year. It's called the "January effect."
Researchers have been studying the January effect for decades and have largely found that the effect does occur regularly. "Markets tend to perform better in January," says Jason Lambert, the president and CEO of Northwest Financial & Tax Solutions near Portland, Oregon.
The effect is a phenomenon similar to the "Santa Claus rally," a seasonal rise in the markets often observed during the last two weeks (final 10 trading days) of the year, fueled by a large volume of year-end trading, the busy retail season, and investor enthusiasm.
January's increase is distinct, though, Lambert says: It's not just leftover Christmas magic from a Santa Claus rally.
Several underlying factors tend to help boost the markets at the beginning of the year. "It's [partially] credited to retail numbers," he says, and a surge in seasonal hiring.
Given the strength of the economy during the 2019 holiday season, many experts are expecting a high likelihood of a January effect in 2020. They also expect the markets to keep rising throughout the year — although at a slower pace than last year.
Investors also tend to be more active than usual right after New Years, which can drive up the markets. Lambert says that in December, many investors engage in a process called tax-loss harvesting, in which they sell some investments to claim a loss on their taxes. Then in January, they reinvest. That surge of money into the market can boost stock prices.
Although research has found the January effect is real, experts say the best thing the average investor can do is to be aware of, but don't pay too much attention to, seasonal market movements. "You don't want to put too much stock in any of them," Lambert says.
Instead, he says, stick to your predetermined strategy of saving and investing regularly and for the long term. That kind of consistent, buy-and-hold approach means you don't have to worry about the day-to-day fluctuations in the markets, and it can pay off, big time: The long-term historical average annualized return for the U.S. stock market is almost 10%.
A $500 investment in the five major U.S. benchmarks 10 years ago would now be worth anywhere from about $1,500 to more than $2,400.
Nowadays, investing is cheaper and easier than ever for ordinary investors. And given that we're at the start of a new year, this is a great time to establish the good financial habits that can be even more powerful than the January effect.
More from Grow: