You do two things every January: You buy back the stocks you sold in December, and you sign up at a health club. “You,” of course, is the hypothetical individual studied by economists, sold to by businesses, and pandered to by politicians (and honored as 2006’s person of the Year by Time magazine). But what is the hidden third thing that “you” do every January, as regards your politics?
The financial “January effect” refers to the fact that January has had the best return out of any month for the past 80 years. The typical explanation has been that people sell their stocks in December to create tax losses or to raise cash for the holidays. Then, come January, they buy back those or similar stocks in such quantities that prices soar. The effect is primarily concentrated in stocks with low market capitalization, because those are more strongly affected by the activities of individual investors.
As investors become more aware of the January effect, what happens? If you know prices will soar in January, you’ll probably start buying earlier, namely, in December. And that’s exactly what’s happened. In the past few years, the January effect has been pushed back, and it’s really more of a December effect nowadays. Over time, it should dissipate entirely.
This is what economics talk about when they mention the “efficiency” of the market. Once information becomes known, it is incorporated into prices and the effect goes away.
How does that compare to everybody’s New Year’s resolution to join a gym, eat healthy, and lose weight? January sees the highest enrollments at health clubs, and even a lot of activity. People do actually go the first few days or even weeks. Then, of course, they stop, and when spring rolls around, the gym is empty again.
What’s the “January effect” there? It is the belief that this year will be different. It’s a powerful belief, and for some people, it works, and they do lose weight and get healthy and exercise often. But for too many of us, we can’t seem to keep our word to ourselves.
This is why marketers put very tempting offers out there, like join for free!, or first month’s free!, or join now and get free sessions with a trainer. They know all they need to do is get us to commit to a long-term deal and we’re stuck. Even if we can cancel, which is often difficult to do, doing so will signal to ourselves that we’ve given up, we’ve failed. Continuing to pay the monthly fee may make us feel like we’ll go next month—we’ve just been real busy.
And what of the political “January effect”? What is as predictable, in the political arena, as the stock-market effect and the health club effect?
What’s predictable is the ways in which we continue to believe the biggest myth of all: that there are only Democrats on the left and Republicans on the right, and as people of the center, we have to sway with the breeze until we choose one of those directions—or they choose us. In fact, both major parties believe in large government, because they are parties of the government. The size of the pie they slice up is exactly equal to the amount of your money they can wrest control of. Both parties want high taxes and lots of regulations, so that even when they can’t buy what they want with money, they can still influence decisions with their regulatory power.
The worst “January effect” of all is that we go to work and start earning, but not keeping, our money. Until around mid-May, we work for the government. Tax freedom day is defined as that day of the year after which every penny we earn goes into our pockets, and not to federal, state, and local tax collectors. In Connecticut, tax-freedom day comes later than it does in any other state; we work longer each year for the government than any state in the country.
Yet we don’t even notice it. It’s the hidden “January effect,” and the one that adds the most pounds to our waistlines and takes the most money out of our bank accounts.
The solution is the same as for the other effects: Take notice. Once we noticed prices went up in January, we started buying earlier, and the effect disappeared. With health clubs, once we notice that we don’t go, we stop signing those long-term contracts. With politics, all we have to do is laugh when the left complains about the right or the right about the left. When we vote for pro-freedom and smaller-government parties like the Libertarians, of which I am a member, the political “January effect” will disappear as well.
Maybe next year, we’ll keep all our money without buying too many stocks, or joining too many gyms, or paying too much in taxes. Maybe.
phil@maymin.com
This article originally appeared in Fairfield County Weekly on January 11, 2007