Published on 11 Jan 2024 on Zacks via Yahoo Finance
5 Small-Cap Stocks to Play the January Effect
Wall Street had a disappointing start to 2024 as the nine-week winning streak snapped, erasing some of the strong gains seen at the end of 2023. Overstretched valuations and uncertainty around when the Fed will begin to cut rates have dampened investors’ optimism. The decline was broad-based, with small-cap stocks plunging the most.The Russell 2000 Index declined 3.7% in the initial week of 2024. The trend might reverse, given what is called the “January Effect," which refers to a seasonal increase in stock prices during the month of January. This phenomenon is often observed in the stock market, where, historically, stock prices have shown a tendency to rise more in January than in other months.For investors looking to capitalize on this opportunity, small-cap stocks that are down in double digits in the initial week of 2024, have a solid Zacks Rank #1 (Strong Buy) or #2 (Buy) and a Momentum Score of B or more seem solid choices. These include Anavex Life Sciences AVXL, Peakstone Realty Trust PKST, AC Immune SA ACIU, Getaround, Inc. GETR, and Akoya Biosciences Inc. AKYA.
Is January Effect a Myth or Reality?
According to some market experts, the January Effect actually runs from mid-December through February, with small-caps continuing to outperform their large-cap cousins.While the start of 2024 has seen some deviation from the expected January Effect, the year-end tax considerations, and investment of year-end bonuses will push the stock market higher in the first month of the year. Investors also redeploy their capital to speculate on weaker performers in January after selling winners in December to create tax losses. Further, the start of a new year often brings renewed optimism among investors, leading to increased buying activity.Over the long term, small-cap stocks have generally shown stronger performance in January compared to large-cap stocks. However, this trend is not consistent every year, and there have been several years where the January Effect was minimal or absent. It has become less pronounced in recent years due to changes in tax laws and the increased use of tax-advantaged retirement accounts.