January has long been viewed as a strong month for stocks, fuelled by seasonal trading patterns and portfolio rebalancing. Known as the January Effect, the phenomenon can drive early-year gains, but its strength varies depending on expectations for the year ahead.
BNN Bloomberg spoke with George Athanassakos, professor of finance at the Ivey Business School at Western University, about why institutional behaviour, central bank policy and investor sentiment all play a role in determining whether the January Effect materializes.
Key Takeaways
- The January Effect is an average seasonal pattern driven largely by institutional investors increasing risk early in the year.
- Portfolio managers often rebalance into riskier assets in January to boost potential returns during a new compensation cycle.
- Strong January performance is more likely when institutions expect a bull market and less likely during bear market expectations.
- A positively sloped yield curve and improving profit expectations tend to support stronger January returns.
- Heavy retail investor participation can be a warning sign, as individuals historically struggle with market timing.
Read the full transcript below:
ROGER: A bit of an off day yesterday, but January is starting strong, and it’s known to be a strong month for stocks. It’s called the January Effect, and we’re exploring the factors that make this month an ideal time for investors, and whether it will be another opportune period this year. Here to talk about it is George Athanassakos, professor of finance at the Ivey Business School at Western University in Ontario. Professor, thank you very much for joining us.
GEORGE: Thank you for having me.
ROGER: First question — the January Effect. Is it still an effect? Does it really exist?
GEORGE: It exists, but it’s an average effect. It doesn’t work every year. Let me put this in context. I’m a value investor, and as value investors, we believe price and value are not the same. The question is what makes price deviate from value.
There are two main factors. One is human nature. Humans are not rational. They herd, they extrapolate, they panic, they become overly pessimistic or greedy. The other factor, which I want to focus on more, is professional bias.
Professionals are driven by self-interest, and they trade throughout the year in ways that affect stock prices and cause prices to deviate from value, even within a single year. Portfolio managers want to maximize total compensation, which includes salary and often a very large bonus.
In January, they have just begun a new annual compensation cycle. They ask themselves what they should do to secure their bonus by year-end. They know that higher risk generally comes with higher expected returns, so early in the year they reduce exposure to safe assets and move into riskier positions relative to their benchmarks.
As a result, there is strong demand for riskier stocks in January, which drives prices higher. If you look at long-term data, January returns are often very strong. As the year progresses and managers get closer to locking in their bonuses, they gradually reduce risk and move back into safer positions.
ROGER: So it’s almost inevitable — the market creates this cycle?
GEORGE: There is rebalancing, but professionals are not acting blindly. That’s why I emphasize this is an average effect. It depends entirely on how professionals believe the year will unfold.
If they expect a bull market, they go heavily into risky stocks. If they expect a weak year, they avoid risk. What we observe is that in strong years, January returns can be very strong, while in weak years, January can actually be negative. On average, strong years show January returns of around seven per cent. So whether we see a January Effect this year depends on how professionals view the outlook.
ROGER: Rebecca wants to jump in with a question.
REBECCA: I’m curious whether central bank policy has changed these effects. Markets seem very focused on whether central banks will cut rates again and reacting more to policy than to seasonal patterns.
GEORGE: Absolutely. Government and central bank policy affect the shape of the yield curve. My research shows that when the yield curve is positively sloped — when short-term rates are well below long-term rates — markets tend to perform better, and we often observe strong January returns.
We also see stronger Januarys when expectations for corporate profits are rising. This year, we have a slightly positive yield curve and slightly positive profit expectations, which is supportive of the January Effect. But these signals are not very strong, and again, it comes back to how institutional investors interpret them.
ROGER: What about retail investors? We’ve seen more of them in the market. Are they starting to have a similar impact to institutional investors?
GEORGE: Over the past couple of years, markets have been driven primarily by retail investors, while many professionals have remained on the sidelines. That’s a significant risk, because retail investors are generally very poor market timers.
Historically, when retail investors move heavily into equities, it has often signalled that markets are near a peak. There was a study by BlackRock that looked at returns over 40 years and found that equities returned about eight per cent annually, but the average individual investor earned only about two per cent.
That gap exists because individuals tend to buy near market peaks and sell near market bottoms. They panic at lows and become overly optimistic at highs. If you behave that way, you’re unlikely to achieve strong long-term returns.
ROGER: We’ll have to wrap it up there, Professor, but thank you very much for joining us.
GEORGE: You’re welcome.
ROGER: That is George Athanassakos, professor of finance at the Ivey Business School.
---
This BNN Bloomberg summary and transcript of the Jan. 8, 2026 interview with George Athanassakos are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
