THE 2025 JANUARY EFFECT…

So, the question is…what exactly is the January Effect? And will we see one this January?

The January effect is a seasonal rise in small caps as well as the general rise in markets, due to December tax loss harvesting, portfolio rebalancing, and sidelined cash or new money that may enter the markets.

While no one truly knows whether the markets will rise this month, the first clue would be to check into seasonality; typically, the weakest months of the year are September and October—ranging from a 1% to 5% drawdown in the markets.

Last year, during this period, both the S&P 500 and the Dow moved 9% to the upside starting from September 6, 2024, to December 6, 2024. This is believed to be fueled by both the potential and the reality of a Donald Trump win. Trump positioned himself as the ‘Drill, baby, drill,’ everything bitcoin, AI, and the deregulation candidate.

The market ate it up and ran it up. Trump’s presidency became an automatic tail wind for increased speculation to the point where stocks saw PE expansion and a non-stop three month run.

This would explain why there was no Santa Claus rally, as stocks sold off causing investors to second guess their footing for 2025, even after two consecutive years of back-to-back double-digit returns.

The S&P finished the year, up 25.01% followed by the Dow, up 12.88%, but the star of the show was the Nasdaq, up 29.8% for the year.

As a comparison, in 2023 the S&P finished with 26.29% gains, including all dividends, followed by the Dow, up 13.7%, and once again the beastly Nasdaq, rose 43.42%.

In the last ten years, from 2014 to 2024, there were seven up Decembers and four down Decembers; every time there was a down December it was followed by an up January.

We saw a long and pronounced rally from September to November, so the market needed a much-welcomed sell-off in December.

This, in my opinion, sets us up for the January effect leading up to the presidential inauguration of Donald Trump; even with tariff uncertainty. the excitement of a pro market president puts deregulation center stage.

A PROFITABLE GAME OF QUARTERS…

Just like football is a game of inches, the stock market is a game of quarters. Although, some choose to turn investing into a series of day trades, the true money is made one successful quarter at a time.

The earnings call doubles as the company’s report card and you receive this report four times a year. This, in my opinion, is where you get to inspect what you expect. And a company should pass your inspection based on their guidance and your measurements.

As a long-term investor, you bet on the management team in both good and bad times.

During the pandemic—the recession, although short-lived, separated weak leaders from the great ones. The strong leadership pivoted and made their investors extremely happy.

The weak leaders faded into obscurity with the momentum. True leaders understand that whether they are successful or unsuccessful, it’s all their fault.

When you are in for the long-term, you understand that the daily noise is just traders creating narratives to capitalize from volatility. I remember getting a call from my aunt, just as the pandemic hit and stocks tanked, and she asked very calmly, what do we do?

I said to her, the same leadership you bet on when stocks were up is the same leadership you bet on when stocks are down. You don’t pay the CEO for what they do when a stock is up, you pay them for how they innovate when a stock is down. After all, do you want a team of lions led by sheep or a team of sheep led by lions?

Trust me, you will know your lions by the size of your percentage gains over the long-term, which leads me to my next point.

Just as Rome wasn’t built in a day, you couldn’t possibly squeeze all the profits out of one stock in a day trade. A day trader will miss 98% of the real gains. I was recommending Apple in 1995 for $18 a share. Apple split four times since I recommended it—2-for-1 on June 21, 2000, and 2-for-1 on February 28, 2005.

After the 2005 split, Apple ran to $700 a share and split again 7-for-1 on June 9th, 2017, dropped to $94 a share, ran to $500 a share, and split again 4-for-1 on August 31, 2020. A one-time, $18,000 investment in 1995 would have netted you 112,000 shares at 250 or approximately $28.2 million dollars.

And although it was 29 years ago, wouldn’t $28 million have been worth the wait? Until this day, I have never met a retail trader who can say they’ve made $28 million dollars a day trading Apple.

This is mainly because they choose the narrative that suits short-term gains.

There is a secret on Wall Street hiding in plain sight. Anyone seasoned knows that the true money made is in companies that can stand the test of time.

However, the narratives sold to retail investors are surrounded by quick-money behavior and using the market to print money.

This is the narrative that benefits Wall Street the most as Wall Street is a transactional powerhouse. And the money isn’t in a one-time transaction it’s in the creation of multiple daily transactions.

The closest comparison to this is life insurance. Life insurance companies are going to push the products that make the most money in both the short-term and long-term. Without getting too complicated, whole life insurance is just as it sounds; as long as you pay your premiums it will be in place for your entire life.

So, in essence, it’s the only insurance policy that can guarantee burial. Term life, on the other hand, ends at the end of the term.

Typically, you pay a small premium for the term depending on your age and health, and the policies are much bigger. This is why you receive those offers in your junk mail for $500k in coverage for 10 bucks looking to bait you into applying, only to find out that prices change due to age and health.

The life insurance industry’s dirty little secret is that between 70% to 90% of people outlive their term policies. So, imagine how much insurance companies make selling the big picture of love, health, and emotions to manipulate you into protecting your family.

And while life insurance is necessary just like the stock market, you must understand it, before you invest.

So, while you thought getting a 20-year term policy with $3 million in coverage for $200 was exceptional, all you did was cover your liability for that period, but not your life for the long term.

But no one will ever school you on it because it’s not profitable for you to know.

The same can be said for Wall Street. Wall Street packages the behavior that profits them the most, and that’s trading. The one thing they need to facilitate this is market volatility and good old-fashioned behavioral economics.

They are fully aware of cognitive biases that impair your judgment; they also know that if they let you win a little, they win a lot, meaning… overconfidence leads to over-trading, which leads to losses and bad decision-making, which translates to a win in the institutional trade column.

They also understand the Prospect Theory, developed by Daniel Kahneman and Amos Tversky. This theory describes how people value potential losses and gains.

The fact is, when given an opportunity to book a loss or gain an investor will choose to book the gain over the losses. They are fully aware of how social influences affect the decision-making process based on the behavior and opinions of others.

This is the herd mentality of following a political figure’s trading habits, like Nancy Pelosi, in the absence of any real research and in hopes that she is somehow in-the-know. And while they may be privy to laws that affect the companies they are buying, this doesn’t excuse the ignorance in the lack of research.

This is why I say the long term is undefeated—as well as Wall Street has a playbook. It includes behavioral economics and all of Wall Street has studied it…why not you?

IS QUANTUM COMPUTING THE NEXT CASTLE IN THE SKY?…

Could the recent quantum fever be a case of building castles in the sky?

By definition, Castles in the sky is a metaphorical phrase often used to describe dreams, lofty ideas or aspirations that are grand and imaginative that can be unrealistic or unreal.

According to Neil Thompson, a research analyst at MIT Sloan and the MIT Computer Science and Artificial Intelligence laboratory—also co-author of, The Quantum Tortoise and the Classic Hare, which provides a framework to understand which problems quantum computing will accelerate and which problems quantum computing won’t.

As an investor, this is an extremely important point to understand, in terms of the speed and use case of quantum computing. It is said there could be as many as 5,000 quantum computers by 2030, but the hardware and software to handle complex problems will not be ready appropriately ‘til 2035 or later.

Due to the fact that current state quantum computing is too unstable, it can potentially take 20 to 25 years to commercialize, if it’s even possible. But the way the Wall Street profit machine works, it quickly packages sellable products to capitalize on the current narrative or trends.

And if this means wiping the dust off an ETF like the Defiance QTUM, created September 4, 2018, so be it. This particular ETF tracks 73 companies globally and its tag line is, Quantum supremacy will bring artificial intelligence and machine learning applications to transform industries.

The fund has not only gained 17% in December on the back of Google’s willow chip announcement, but has attracted $250 million in cash inflows in December, which is more than the $164 million since its inception in 2018.

“Quantum is having the same momentum as Artificial Intelligence did in 2023,” said Bloomberg’s analyst, Athanasios Psarofagis. He also said he wouldn’t be surprised if you see quantum computing filings for companies to go public.

First of all, there is a difference between momentum backed by revenues, earnings, and real-world applications, and momentum backed by hype.

This momentum is a mirror image of what I witnessed in the Dot-com Era. Investors rushed in and purchased anything associated with the internet and we all know what happened next.

Today’s investor is a little less seasoned and determined to turn the stock market into a gum-ball machine hoping to get the prize with the million-dollar lottery ticket in it.

They don’t care about fundamentals, or the potential rug pulls. And who can blame them when companies like D-Wave Systems and Riggetti Computing go up 800% and 1000%, respectively, jumping from penny stock obscurity to the hottest thing since sliced bread on the Gen Z and the Millennial get money list.

It’s hard to reason with someone who just took a 50-cent penny stock and turned it into a $200k portfolio. And why should you? This is their way of getting back at a system that tried to close the door in their face.

Instead, they are screaming, “DEFY!” all the way to the bank, and the stuffy men of Wall Street are too old to see their reality.

While this may be true, it is the ego and the feeling of vindication that leads you to think that the ride is going to last forever. After all, I was just like them— young, rebellious, and anti-system.

What Wall Street must realize is that Gen Z and Millennials aren’t swallowing the same bait. They aren’t looking to get married to a stock like their parents. To them, a few dates and a couple of one-night stands is more than satisfactory.

Maybe one day, if not sooner than later, the castle in the sky may fall to the ground, but as of now while these companies continue to have 20% and 30% days, you can forget about rationality.

DON’T DIE IN YOUR WORK CLOTHES…

You can’t teach an old dog new tricks, so fire yourself and hire your money before it’s too late.

Warren Buffet once said, “If you don’t find a way to make money in your sleep, you will work until you die.”

Here are a few stats:

• Seven out of 10 Americans say estate planning is somewhat important, but only 26% of Americans have an estate plan—32% of which are males versus 23% being females.

• 63% of the people making over 80k a year say they have not gotten around to it or used procrastination as their primary excuse.

• 42% of people making between 40K and 80k say they don’t have time to plan and 32% of the people think they don’t make enough for estate planning.

• And when it comes to inheritance, parents with a college degree leave behind an average of $92,700 versus $76,000 for parents without.

• And to make matters worse, 53% of people have no idea where to find their parents’ estate planning documents.

Now here is the moment of truth…how serious are you about your family’s legacy or last name, and what steps have you taken to ensure you have a family succession plan?

It’s a general fact that most folks in America are too concerned with the here-and-now and not enough with the distant or not-so-distant future.

The evidence is in the data; the average 401K by age is:

Using simple math, take your total liquid assets and divide them by 25 years, with the assumption that you retire at 65, and you live to be 90 (the mortality rate is 76 to 81, depending on gender)—but what if you outlive the average?

Next, divide the yearly number by 12; if that number is less than your current cost of living inclusive of Social Security, you are in trouble.

If we take the average retirement 401k at $272,588, divided by 25 years, the total is $10,903.52. Next, divide by 12 months; this gives you a whopping $908.62 per month.

Even if you received full social security benefits of $3,410, this would give you $4,318.62 of monthly income—unless you are willing to trade an additional 10 years more of your retirement for an extra $928 or $5246.62 a month.

And considering this trade-off, is it even worth it? And that’s if you manage the 401k money correctly, but one thing is for certain—it guarantees no money will pass from your generation to the next generation; feel familiar?

Unfortunately, this is the road most Americans are broken down on, as only 26% of Americans will leave an inheritance, which means 74% will not.

I call it the 21/44/15 rule—21 years of schooling, 44 years of work, and if you are lucky, you see 15 years of retirement, considering the average mortality rate for men is age 75.8 and 81.1 for women.

This is a miserable existence, and the system is set up, so you are always one step behind the eight ball. The problem is Americans think they have a choice as to whether they invest or not, when in reality…there is absolutely no choice.

Inflation has made it so that an underperforming dollar is slave to time, because a dollar earned today is worth less in the future. So, unless you invest in a compounding instrument like the S&P 500, the chance of having a dignified retirement is slim to none.

Now, the writing is on the wall - it’s whether you choose to read it or not. You either learn how to put your dollars to work or you end up dying in your work clothes.

SOCIAL SECURITY IS NOTHING BUT A PONZI SCHEME….

I woke up on New Year’s Day with the thought process that I only have 8,030 days left to live if I should make it to 80—now, God willing he has more in-store for me.

But it has inspired this scribe, ,

One can’t live on Social Security and their 401k alone, as inflation is weighing heavily on the future net worth of their dollars.

Social Security was introduced August 14, 1935, during the Great Depression by President Franklin D. Roosevelt, as part of The New Deal, to promote economic relief and reform.

Social Security started as a 1% payroll tax for both the employer and employee, totaling 2%, to finance the program. Due to few political maneuvers, amendments, and benefit increases, social security payroll taxes increased to 6.2% for both the employer and the employee, for a total of 12.4% current state.

For those who aren’t familiar, Social Security is a pay-as-you-go program, which after you break it down, turns out to be nothing but a huge Ponzi scheme.

Here is how it works. Whenever an employer pays an employee, 6.2% is deducted from both the employer and employee.

The government receives these funds. These funds are neither saved nor invested. Instead, they are immediately used to pay current retirees, disabled individuals and survivors of deceased workers.

For the system to work, it relies heavily on the continuous flow of worker bees to contribute to the Social Security pool.

For the older retirees to get paid in the system, it relies on its younger workers entering the workforce to pay future benefits. How is this not a Ponzi scheme?—Especially when the government puts surplus funds in a social security trust and uses it as a source of funds for other government pork programs.

How do you ask? Very simply…When the government collects more social security benefits than it pays out. The surplus funds are deposited into the Social Security trust and invested into special U.S. treasury bonds.

When the government needs funds, it simply redeems the bonds as a way of the government borrowing from itself, which is very Bernie Madoff of them.

At this rate how is Social Security even sustainable? Answer…it’s not!

This also bleeds over into the issue of immigration and low birth rates because an aging population can lead to slowing economic growth and too few workers can result in slowing economic productivity, which explains the inclusion of approximately 2.4 million immigrants into the U.S. during the Joe Biden presidency.

Since 1950, birth rates have consistently and dramatically declined.

• In 1957, the birth rate was 122 per 1000

• In the 1970s, the birth rate dropped to 88.5 per 1000

• Then, it dropped off a cliff in 1990 with 16.7 per 1000

• It spiked in 2007 to 69.3 per 1000, between women ages 15 to 44

• In 2013, it slightly dropped to 62.3 per 1000

• In 2020, it dropped again to 55.8 per 1000, between 15 to 44

• In 2024, it is currently 11.99 per 1000

Anyone with half of a financial mind understands the law of large numbers, the bigger the base, the higher the rate of compounding.

Why doesn’t the government understand this?

We would be better off if we had the option to invest our social security tax payments into a locked account invested in the S&P 500 until retirement age.

If that were the case, it would look like this:

Let’s say a person that makes $55k; pays 6.2% or $3,410 in social security taxes a year. Let’s say they worked for 44 years—from the age of 21 to 65. If they just received the S&P 500, 100-year average of 10%, everyone would receive approximately $2.67 million.

This is a whole lot better than the average balance of $272,588 in 401k’s at 65, and it beats having to work ‘til the age of 67 to receive 100% or full retirement benefits, if you were born in 1960 or later. Working at 70 is less attractive when you look at the mortality rate, with potentially less than 10 years to live.

And when you do the math, at 67—depending on your income, the highest monthly benefit in 2023 was $3,627, which in today’s times is unlivable.

Which then forces folks to work to the age of 70, an additional three years for an 8% bump per year or 124% of your full retirement benefits, which translate to an additional $928 a month or $4,555 monthly, which is equivalent to a 78k to 80k a year income.

This is why playing with the scoreboard and time clock is very important, because if you are both responsible and accountable you can replace the government as your caregiver and turn dollars into moments by buying back your time. All it takes is a plan and good old-fashioned discipline and consistency.

So, make this your New Year’s resolution and hold your younger self accountable to pay your older self and guarantee your retirement, instead of paying for someone else’s retirement while yours is unassured.

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Don’t get smoked by quantum computing…

Question Of The Week…

Do you think we will see The January Effect?

Thank you for reading; if you love it, share it, that’s how we grow!!

Kevin Davis Founder of Investment Dojo and Author of The C.R.E.A.M. Report