‘January Effect’ in Stocks May Come Late This Year

The stock market’s “January effect” may become a February effect this year.

So says UC Irvine finance professor Robert Haugen, co-author of “The Incredible January Effect,” a book that details the tendency of small-company stocks to outperform blue chip stocks at the beginning of each year.

But so far, the January effect has not been terribly effective. All the major stock indexes have fallen in the first two trading days of January--even the broad-based Standard & Poor’s 500 and the smaller-stock-oriented American Stock Exchange.

The reason? Blame it on Saddam Hussein.

Haugen said money managers whose start-of-the-year aggressiveness makes the January effect work are likely to be holding back now because of the mid-month deadline for Iraq to pull out of Kuwait.

But don’t worry, investors--be happy. February could be your month.

Haugen, a corporate finance and investments specialist, said Thursday that once the Iraq situation becomes clearer, the investment climate will improve. Also, if the current recession is a mild one, as many economists expect, then the market has just about hit bottom--meaning that savvy investors are likely to stop selling and start buying soon.

“The kind of company whose stock responds well to the effect is a high-risk company with a small market capitalization, no dividend, a high debt-to-equity ratio, a small price per share and poor stock-price performance over the past five years,” Haugen said.

“Those are negatives to most investors, but to money managers who go after value relative to growth--and that is most money managers--those actually are attractive signs,” as long as the company doesn’t have serious management or marketplace problems, he explained.