not. The results are surprising. Some anomalies have weakened and
even reversed, while others remain as strong as they have always been.
Here is a rundown.
SEASONAL ANOMALIES
The most important historical calendar anomaly is that small-capitaliza-
tion stocks have far outperformed larger stocks in January. This effect is
so strong that without January’s return, small stocks would have a lower
return than large stocks over the past 80 years!^1
This outperformance of small stocks in January has been dubbed
theJanuary Effect. It was discovered in the early 1980s by Donald Keim,^2
based on research he did as a graduate student at the University of
Chicago. It was the first significant finding that flew in the face of the ef-
ficient market hypothesis that claimed there was no predictable pattern
to stock prices.
The January Effect might be the granddaddy of all calendar anom-
alies, but it is not the only one. For inexplicable reasons, stocks generally
do much better in the first half of the month than the second half, do well
before holidays, and plunge in the month of September. Furthermore,
they do exceptionally well between Christmas and New Year’s Day, and
until very recently, they have soared on the last trading day of Decem-
ber, which is actually the day that has launched the January Effect.
Why these anomalies occur is not well understood, and whether
they will continue to be significant in the future is an open question. But
their discovery has put economists on the spot. No longer can re-
searchers be so certain that the stock market is thoroughly unpredictable
and impossible to beat.
THE JANUARY EFFECT
Of all of the calendar-related anomalies, the January Effect has been the
most publicized. From 1925 through 2006, the average arithmetic return
on the S&P 500 Index in the month of January was 1.57 percent, while
the average returns on the small stocks came to 6.07 percent. The 4.5 per-
centage point excess return of small stocks in January exceeds the entire
306 PART 4 Stock Fluctuations in the Short Run
(^1) This includes the dramatic 1975 to 1983 period during which small stocks returned over 30 percent
per year.
(^2) Donald Keim, “Size-Related Anomalies and Stock Return Seasonality: Further Empirical Evi-
dence,”Journal of Financial Economics, vol. 12 (1983), pp. 13–32.