It’s a Screwy January, Not Going by the Book

John Dorfman

When I was a boy, my father took me to the race track. I was entranced by the Daily Racing Form, which contained a wealth of information about every horse’s past performance.

“There’s one problem,” my father said. “The horses don’t read the form.”

As I look at the stock-market action in January, I’m reminded of my father’s remark. Traditionally, January is famous in the stock market for three things: the market usually rises; small stocks usually beat big ones; and last year’s losers often bounce back.

So far, this January isn’t running true to form. The market has risen, but small stocks are lagging and last year’s losers are getting hammered again.

Losers Slump

The reason the previous year’s losers often rebound in January is simple: tax selling. Late in each year, investors typically dump their losing stocks to establish a tax loss. Thus, beleaguered stocks get kicked while they are down, and some become bargains. Come the new year, tax selling abates and bargain-hunting commences.

That is not happening so far in 2019. To see how last year’s losers are doing, I looked at a sample of ten stocks that fell badly in 2019: Benefitfocus (BNFT), EQT (EQT), Green Dot (GDOT), Inogen (INGN), Organogenesis Holdings (ORGO), Peabody Energy (BTU), Range Resources (RRC), Tenneco (TNE), Unit (UNIT) and 2U (TWOU).

Eight of the ten have declined further in 2020 through January 24. Five of them have dropped another 20% or more. The only two that have advanced so far this year are Organogenesis (up 0.6%) and Green Dot (up 24%).

Small Stocks Fizzle

Small stocks are supposed to beat large-capitalization stocks in January. The reasons for this are obscure, and may have something to do with new year’s optimism. In any case, it isn’t happening so far this year. Through January 24, small stocks (as measured by the Russell 2000 Index) were down 0.4%, while large stocks (as measured by the Standard & Poor’s 500 Index) were up 2.0%.

Market Up

The one way in which this January conforms to traditional market lore is that it has been an up month—so far.

On January 17, the Dow Jones Industrial Average hit an all-time closing high of 29,348, and the Standard & Poor’s 500 Index hit a record high of 3,329. The signing of a Phase One trade agreement between the U.S. and China on January 15 contributed to the market’s health.

But on January 18 the market started to subside as news spread about a new virus emanating from Wuhan, China. It is a form of coronavirus, for which at present there is no cure. More than 80 people have died, and there are hundreds of cases, including a couple so far in the U.S. So, with one week left in January, there is a real question whether the stock market will be up for the month or not.

What’s Up

Why is January acting wacky this year? Perhaps a confluence of events—the impeachment, the partially resolved trade dispute with China, and the Wuhan virus—have dampened investors’ risk appetite, causing them to shun small stocks and last year’s losers.

Yet, if investors are feeling risk averse, why is the market up at all? Much of the answer lies, I think, in the popularity of index funds that mimic the Standard & Poor’s 500 Index. Over the past 20 years, proponents of indexing—most notably John Bogle of Vanguard Funds—have sold the public on this approach. The theory is that no one can beat the market consistently, so you should just invest in the overall market and keep management fees to a minimum.

I believe that a fair number of index investors misperceive the risk. They have somehow come to feel that while stocks are unsafe, index funds are safe. Yet index funds are merely a way—a formulaic way—to invest in stocks.

By definition, S&P 500 index investors are not picking small stocks. It is a large-cap index. Some of last year’s losers will be found in the S&P but their weight in the index will be relatively small because it’s a market-cap weighted index. Stocks that have done well—the likes of Facebook and Netflix—have big weights.

At some point the indexing trend—dare I say, fad—will reverse, and the market will start to favor less well-known issues with better valuations. But that point is not here yet.

What’s the moral here? Historical market patterns are always interesting, but never the final word. As my father said, the horses don’t read the form.

Disclosure: A private partnership I manage owns call options on Green Dot.


John Dorfman is chairman of Dorfman Value Investments LLC. His firm or clients may own or trade securities discussed in this column. He can be reached at


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