In Syracuse, we see lake effect snow every January. But there’s another sizable “effect” in January if you know where to look. This one’s in the stock market.

The “January Effect” is the outperformance of small-cap stocks versus large-cap stocks in the first month of the year. Going back to 1926, small companies have rallied an average of 4.4% in January. Large companies meanwhile have averaged 1.1%. That 3.3% difference represents almost all of small-cap’s outperformance on an annual basis.

In 2021, small-caps gained 6.5% while large-caps lost 0.7%. That 7.2% difference is the largest small-cap outperformance in the last 20 years and a big part of why our holdings are outperforming a market-neutral portfolio this year.

Having an overweighting to small-cap stocks has historically improved a portfolio’s risk-adjusted return and for that reason we will maintain it. Whether that benefit continues to come in January or decides to come around Mother’s Day makes no difference to me… but I can’t say the same about snow.