Year-Round (Non-Seasonal) Anomalies
The stock market is home to countless proverbs that have provided investors with important lessons over the generations. These sayings are grounded in the real-world experience of those who came before us — knowing them can help you navigate even the most turbulent markets with an edge.
This article introduces non-seasonal (year-round) stock market anomalies, and briefly explains the meaning of each.
- Small-cap effect
- Value effect (undervalued stock effect)
- Dividend yield effect
- Momentum effect
- Return reversal effect
- Low-volatility strategy
- Presidential cycle
- Turn-of-the-month effect (TOM effect)
- Day-of-the-week effect (Monday weakness)
- The dreaded Wednesday
- Market turbulence when the month starts on the 2nd
- Chinese zodiac anomaly
- Sazae-san effect
- Ghibli’s Law
Seasonal Anomalies
This article covers non-seasonal year-round anomalies, but I’ve also written a separate article on monthly and seasonal anomalies. Check it out if you’re interested — seasonal anomalies tend to be the more famous ones.
Small-Cap Effect
This anomaly observes that small-cap stocks (low market capitalization) tend to produce higher average returns than large-cap stocks over time.
Reasons cited include: small caps are under-followed and often left undervalued; small companies can show faster percentage-based business changes. Academically, this effect has been fairly well documented.
From a common-sense perspective, it makes sense: a small-cap stock requires less capital to move the price, so when it becomes popular, its percentage gain far exceeds that of a large cap.
That said, small caps also fall harder than large caps during crashes. Understand that risk before investing. In practice, “small cap” in Japan is often taken to mean a market cap of roughly ¥10 billion or less.
Value Effect (Undervalued Stock Effect)
This anomaly holds that “undervalued” stocks (low market cap relative to company performance) tend to produce higher average returns than “overvalued” stocks.
This seems obvious in theory, but many investors ignore whether a stock is cheap or expensive and focus only on near-term price movement.
As Warren Buffett observes, over the long term stock prices tend to gravitate toward levels reflecting actual business performance — so undervalued stocks have better prospects than overvalued ones. A common benchmark: PER ≤ 15x and PBR ≤ 1x.
Dividend Yield Effect
This anomaly holds that high-dividend stocks tend to produce higher average returns than comparable stocks without high dividends.
High-dividend stocks are heavily featured in various media and attract many investors who may not fully understand the market — making them naturally more likely to appreciate.
However, dividends require strong earnings to sustain. If business deteriorates, dividends may be cut (reduced dividend) or eliminated (no dividend). So high-dividend stock investing carries its own risks. A common threshold for “high dividend” is an annual yield of 4%+. Yields above 3% are also considered respectable.
Momentum Effect
This anomaly holds that once a stock establishes a direction (trend), it tends to continue in that direction. Stocks in an uptrend tend to keep rising; stocks in a downtrend tend to keep falling.
Many investors are aware of this through experience — which is precisely why so many focus heavily on whether a stock is in an uptrend or downtrend.
The momentum effect is particularly strong over short to medium-term periods (3 months to 1 year), but tends to reverse over the long term (reversal effect). Some researchers have argued that the effect has weakened in recent years as more investors explicitly target it.
Return Reversal Effect
This anomaly holds that stocks with low recent price appreciation tend to show high appreciation in the future, and vice versa. Stocks that have lagged for years tend to eventually recover; stocks that have surged for years tend to eventually slow.
This effect is most visible over long periods (3–5 years). In the medium term, momentum tends to dominate.
In plain terms: what goes down will eventually come back up, and what goes up too far will eventually come back down. This is the basis for “contrarian investing.”
That said, companies whose business performance has actually caught up to their stock prices — or continues deteriorating — may not show this reversal. The trend could simply continue. Keep that in mind.
Low-Volatility Strategy
This anomaly holds that stocks with low price volatility (small swings) tend to produce higher returns than highly volatile stocks — which contradicts traditional finance theory (higher risk should mean higher return).
Academic research has found relatively strong evidence for this effect. Proposed reasons include: low-volatility stocks tend to have stable business performance and consistent dividends.
The practical lesson: individual investors are naturally drawn to high-volatility stocks, but in reality, holding stable low-volatility stocks for the long term tends to be more profitable.
Presidential Cycle
This anomaly is tied to the U.S. presidential election cycle, held every four years. The year before the election tends to produce the highest stock market returns; the election year itself also tends to be relatively strong.
Conversely, the first and second years after an election tend to show lower returns. This four-year cycle is called the “Presidential Cycle.”
The pre-election year is strong because candidates push economic stimulus measures to boost their electoral prospects — and markets price that in.
There are some claims that Democratic vs. Republican winners affect the cycle, but real data suggests the market difference between the two parties is minimal.
Turn-of-the-Month Effect (TOM Effect)
“Turn of the Month” (TOM) refers to the month-end to month-start transition. This anomaly observes that stock prices tend to be relatively low at month-end and high at month-start.
Attributed to hedge fund settlement and re-entry patterns around month boundaries. In recent years, however, the reliability of this anomaly seems to have diminished.
Day-of-the-Week Effect (Monday Weakness)
This anomaly is simple: stocks tend to fall on Mondays and rise on Fridays.
The reason: bad news that breaks over the weekend (Saturday–Sunday, when markets are closed) tends to cause a sell-off on Monday when markets reopen.
That said, good news can also break on weekends, and often no market-moving news appears at all (which is actually the more common case). Personally, I don’t think this anomaly warrants much attention.
However: if a market is highly volatile or a particular stock is running at unusually elevated levels, carrying it through the weekend can lead to ugly Monday results. In those cases, selling before the close on Friday is a valid strategy.
Market Turbulence When the Month Starts on the 2nd
“Shinpo” (新甫) refers to the first trading day of a new month in the futures market. This anomaly says that when holidays prevent the 1st from being a trading day — making the 2nd the first trading day — that month tends to see larger price swings.
This is a fairly well-known anomaly but has little academic support. It’s essentially equivalent to the Turn-of-the-Month Effect and probably doesn’t need much attention.
Chinese Zodiac Anomaly
Various anomalies are associated with the Chinese zodiac (12-year cycle). For example: “Rat brings prosperity,” “Ox stumbles,” “Tiger runs a thousand miles,” “Rabbit leaps,” “Dragon and Snake form the ceiling,” “Horse descends,” “Sheep endures,” “Monkey and Rooster are turbulent,” “Dog laughs,” “Boar consolidates.”
Explaining all of them in detail would make this article very long, so here is a brief summary table:
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Honestly, the reliability of these zodiac anomalies is nearly zero. Monthly and seasonal anomalies still have higher credibility than year-long zodiac patterns. These are best treated as cocktail party trivia.
Sazae-san Effect
This anomaly holds that when viewership ratings for the anime Sazae-san are high, stock prices tend to fall — and when ratings are low, prices tend to rise.
It may sound absurd, but research published by Daiwa Securities Research Institute in 2005 found a surprisingly high correlation.
The proposed reason: when stocks are rising and the economy is strong, people go out more on Sundays and fewer people watch Sazae-san at home. This is an anomaly in the truest sense — a real pattern with no rational explanation.
Ghibli’s Law
This anomaly claims that when a Studio Ghibli film is broadcast on Friday Road Show (a weekly Japanese TV movie program), the following week’s market tends to be turbulent — with yen appreciation and stock price declines.
The actual explanation: the Friday Road Show broadcast time often overlaps with the release of the U.S. employment report, which is one of the most important market-moving data releases investors track.
So the Ghibli element is probably irrelevant — the timing overlap with the jobs report is what drives the market effect. Still, it’s an amusing anomaly worth knowing.
Summary
This article introduced non-seasonal (year-round) stock market anomalies. Knowing these in advance will help you navigate even the most turbulent markets — keep them in mind whenever you execute a trade.
I also have an article on investment fundamentals. Check it out if you’d like to strengthen the basics.
📚 Series: Stock Market Proverbs Series (9/9)
