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The January Effect
It is defined as a perceived seasonal increase in stock prices during January.
Analysts generally attribute this rally (a period of sustained increases in the prices of stocks, bonds, or related indexes) to two factors.
- A price drop happens in December - when investors prompt a sell-off due to tax-loss harvesting to offset realized capital gains - followed by an increase in buying in January.
- Investors use year-end cash bonuses to purchase investments in January.
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Studies and Criticism
- A study analysing data between 1904 and 1974 revealed that the average return for stocks during January was five times higher than any other month, particularly in small-capitalisation stocks.
- Another study from 1972 to 2002 found that the Russell 2000 inde...
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January Effect Explanations
Besides tax-loss harvesting and repurchases, and investors putting cash bonuses into the market, the January Effect is affected by investor psychology.
- Some investors feel that January is the best month to begin an investment program.
- Others think that mutua...
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Understanding The January Effect Hypothesis
The January effect was first noticed in 1942 but has been less pronounced in recent years. The hypothesis suggests that markets as a whole are inefficient. Efficient markets would not follow this effect.
Small caps - companies with a relatively small market capitalisation ...
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January Effect Explanations
Besides tax-loss harvesting and repurchases, and investors putting cash bonuses into the market, the January Effect is affected by investor psychology.
- Some investors feel that January is the best month to begin an investment program.
- Others think that mutua...
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