Will the Fiscal Cliff Compromise Enhance the January Effect?

The payroll tax was left to expire and spending cuts were non-existent as the $109 billion in defense and domestic program spending was delayed for two months. Even though the deal is actually projected to increase the nation’s deficit by $4 trillion over the next 10 years, Wall Street was pleased with some clarity.

Over the course of the first trading week of 2013, the Dow Jones Industrial Average jumped 330.91 points, while the S&P 500 and Nasdaq both gained more than 2 percent. The iShares Russell 2000 Index Fund, which focuses on small cap companies, bounced over 3 percent. The Dow has not declined on the first trading day of the year since 2005. Blue-chip members such as Intel (NASDAQ:INTC), JPMorgan Chase (NYSE:JPM) and McDonald’s (NYSE:MCD) finished the first trading week of the year higher than they finished 2012. Bank of America (NYSE:BAC), the best performer in the index last year, surged over 4 percent to round out the week. Shares of Apple faded lower after the giddy market start as analyst concerns surfaced, finishing the week 5 points below its 2012 closing price.

While the January Effect is the strongest among small caps, the Dow also receives a boost. Since the late 1800s, the index has logged gains in 63 percent of all Januarys, compared to 57 percent in other months, according to MarketWatch. Furthermore, the average gain in January is nearly 1 percent, higher than the 0.6 percent average among other months. When January is a positive month, the rest of the year tends to post gains 67 percent of the time. However, with the spending cuts and national debt ceiling still looming in the coming months, investors should not become too complacent with the early gains.

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