Missing ‘January Effect’ May Be Lost for 2012: Chart of the Day

Anyone expecting the so-called January effect to turn shares of smaller U.S. companies into market leaders may end up waiting in vain, according to Steven G. DeSanctis, a strategist at Bank of America Merrill Lynch.

“We do not think we will see a January effect occur in the remainder of this month or next month,” DeSanctis wrote yesterday in a report.

As the CHART OF THE DAY depicts, smaller companies have only kept pace with larger ones since the end of October. In past years, they rallied during the period in anticipation of further gains in January. The chart compares the Russell 2000 Index, whose companies have a median market capitalization of about $455.65 million, and the Standard & Poor’s 500 Index, with a median market cap of $11.1 billion.

Price swings linked to concern that the U.S. and European economies are faltering explain why the effect is unlikely to surface, according to DeSanctis, a small-cap stock specialist based in New York.

Volatility for the Russell 2000 peaked on Nov. 30 at an annual rate of 49.6 percent, based on its 90-day performance. The reading was the highest in 2 1/2 years, according to data compiled by Bloomberg.

In January, small caps beat large caps 73 percent of the time since 1926, according to his analysis of figures from the University of Chicago’s Center for Research in Security Prices. The percentage is the highest for any month of the year. Small caps also had their best monthly performance in January, with an average gain of 4 percent, DeSanctis wrote.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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