January effect

A general increase in stock prices during the month of January. This rally is generally attributed to investors buying stocks that have dropped in price following a sell-off at the end of December by investors seeking to create tax losses to offset any capital gains.

Investopedia Says:
The January effect is said to affect small-caps more than mid/large caps. This historical trend, however, has been less pronounced in recent years because the markets have adjusted for the effect. Another reason the January effect is now considered less important is that more people are using tax-sheltered retirement plans and therefore have no reason to sell at the end of the year for a tax loss.

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Phenomenon that stocks (especially small stocks) have historically tended to rise markedly during the period starting on the last day of December and ending on the fourth trading day of January. The January Effect is owed to year-end selling to create tax losses, recognize capital gains, effect portfolio Window Dressing, or raise holiday cash; since such selling depresses the stocks but has nothing to do with their fundamental worth, bargain hunters quickly buy in, causing the January rally.

The January Effect is a calendar-related anomaly in the financial market where financial security prices increase in the month of January. This creates an opportunity for investors to buy stock for lower prices before January and sell them after their value increases.

Therefore, the main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.

This type of pattern in price behavior on the financial market supports the fact that financial markets are not fully efficient.

The January Effect was first observed in the early 1980s by Donald Keim who, at the time, was a graduate student at the University of Chicago. It is the observed phenomenon that since 1925, small stocks have outperformed the broader market in the month of January, with most of the disparity occurring before the middle of the month.^[1]

The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. The January effect does not always materialize; for example, small stocks underperformed large stocks in January 1982, 1987, 1989, 1990, and 2008.^[2]

See also

• financial market efficiency

References

1. ^ Keim, Donald B.: Size-Related Anomalies and Stock Return Seasonality: Further Empirical Evidence, Journal of Financial Economics 12 (1983)
2. ^ Siegel, Jeremy J.: Stocks for the Long Run (Irwin, 1994)pp. 267-274

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