The January Effect
January effect
The January effect is a hypothesis that there is a seasonal anomaly in the financial market where securities' prices increase in the month of January more than in any other month. This calendar effect would create an opportunity for investors to buy stocks for lower prices before January and sell them after their value increases.
How does the stock market perform in January?
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Is January good month for stocks?
The January Effect refers to the hypothesis that, in January, stock market prices have the tendency to rise more than in any other month. This is not to be confused with the January barometer, which posits that stocks' performance in January is a leading indicator for stock performance throughout the entire year.
What usually happens to stock market in January?
The January Effect is the belief that the stock market has a tendency to rise in January more than any other month. While there are many potential causes, it's often said to be a result of investors reentering the market after selling off their stocks at year end to lock in their losses for tax purposes.
Do stocks Decline in January?
January market drops are now fairly common, including in the previous two years, which nonetheless ended with large annual gains. Many Wall Street strategists are predicting that the market will end 2022 higher.
Should I sell stocks in December or January?
So again, the last trading days of the year can offer some bargains, even if historically, a sell-off comes in December—and with it a potential drop in investment value for new investors—which is a factor to remember after a potentially big January effect.
Is now a good time to invest 2021?
The recent volatile price action in the stock market has been scary for some investors, especially younger ones just dipping their toes into putting money away for the long-term. Still, financial experts say that now is a good time for people to start investing or to continue to add money into stocks.
Are stock prices more volatile in January?
Wachtels observation was supported by a study that analyzed the markets data for over seventy years running from 1904 to 1974. The study discovered that the return on stocks was five times greater, especially with small-capitalization stocks, during January than in any other month.
What are typically the best months for the stock market?
Using stock market data from 2000 to 2020, the best month to buy stocks is April, as the S&P500 has increased 2.4% in 15 of the last 20 years. October and November are also good months to buy stocks, increasing by 1.17% and 1.08%, respectively, increasing 75% of the time.
What month is the stock market the highest?
What the Data SaysRankMonth of YearFrequency of Growth (%)#1December79.0%#2April74.3%#3October68.6%#4July61.7%9 more rows•May 30, 2022
Why do investors sell off stocks in December?
According to this hypothesis, investors sell off underperforming stocks in December to lock in a capital loss for the year, thereby reducing their tax bill, which causes a temporary dip in prices. In January, prices recover when buying picks up again.
What is the January effect?
The January Effect refers to the hypothesis that, in January, stock market prices have the tendency to rise more than in any other month. This is not to be confused with the January barometer, which posits that stocks' performance in January is a leading indicator for stock performance throughout the entire year.
NASDAQ: NVAX
The market drop in January 2022 was a different beast. My portfolio lost 20% in 31 days. It would have been a lot worse, too, but the market bounced a bit during the last three days of the month. And this time, it's not nearly as obvious why the market tanked.
1. Profit-taking
You might have forgotten this, but the stock market just had two really high-returning years in a row. In 2020, the S&P 500 gained 16%, even though it was the first year of the pandemic. A lot of internet stocks put up great numbers. Many stocks in many sectors were hammered, but overall, the market did just fine.
2. Tax planning
Traders often like to wait until January to sell stocks, and there's a reason for that. When you sell shares at a profit, the next year, come April 15, you have to pay taxes on your capital gains. By selling in January, you extend the period you have before that tax bill comes due -- in this case, until April 15, 2023.
3. What about omicron? Or the possibility that Russia might invade Ukraine? Or rising interest rates?
When it's not clear why the market is falling, all you can do is speculate. Some pundits thought that fears about the possible economic impacts of the omicron surge were causing traders to bid stocks down. Others pointed to the possibility of war in Ukraine.
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1. Omicron supply chain issues (domestic and abroad)
The most obvious obstacle for the S&P 500 is the ongoing spread of coronavirus variants, of which omicron is now the most predominant in the United States. The issue is that there's no unified global approach as to how best to curtail omicron. Whereas some countries are now mandating vaccines, others are imposing few restrictions, if any.
2. QE winding down
Another fairly obvious high-risk factor for Wall Street is the Federal Reserve going on the offensive against inflation. As a reminder, the Consumer Price Index for all Urban Consumers (CPI-U) rose 6.8% in November, which marked a 39-year high for inflation.
3. Margin calls
Wall Street should also be deeply concerned about rapidly rising levels of margin debt, which is the amount of money that's been borrowed by institutions or investors with interest to purchase or short-sell securities.
4. Sector rotation
Sometimes, the stock market dives for purely benign reasons. One such possibility is if we witness sector rotation in January. Sector rotation refers to investors moving money from one sector of the market to another.
5. Meme stock reversion
A fifth reason the stock market could crash in January is the potential for a dive in meme stocks, such as AMC Entertainment Holdings and GameStop.
6. Valuation
Even though valuation is rarely ever enough, by itself, to send the S&P 500 screaming lower, historic precedents do suggest Wall Street may be in trouble come January.
7. History makes its presence felt
Lastly, investors can look to history as another reason to be concerned about the broader market.
The January Effect hypothesis
The January Effect is a hypothesis that there's a seasonal phenomenon in the financial market where stock prices rise more in January compared to the other months. Mainly, there's heavy selling in December and aggressive buying in January, specifically early in the month. From 1928 to 2018, the S&P 500 Index rose 62 percent of the time in January.
January Effect was early in 2020 amid the COVID-19 pandemic
The January Effect came early in 2020 amid the COVID-19 pandemic, according to Jefferies strategists. “We think an early January Effect is driven by the fact that investors may be reluctant to sell their winners while in their 2020 fiscal year and generate a large capital gains tax when it has been a tough year,” Jefferies analysts said.
Stock market in January 2021
The stock market ended 2020 with an all-time high on the last day of the year. In 2020, the S&P 500 and the Nasdaq Composite gained 16.3 percent and 44 percent. January 2021 could be choppy due to rising coronavirus infections and deaths nationwide. The month started with the U.S.
Investors can take advantage of the January Effect
Investors can benefit from the January Effect by buying shares of stocks that lost big the previous year. The two stocks that could turn the corner in 2021 are Intel and Boston Scientific. In 2020, Intel delayed product launches. Also, weak management allowed competitors to pick up market share.
The January Effect Explained in Less Than 5 Minutes
Mike Price is a personal finance writer with more than six years of prior experience working in the banking industry. He specializes in writing about investing, real estate and accounting for The Balance. His work has also been featured in other notable financial websites such as The Motley Fool.
Definition and Examples of the January Effect
In 1942, investment banker Sidney Wachtel noticed that stocks tended to go up in January more than in other months. 1 Academics confirmed this theory over the years in U.S. stocks, other asset classes, and other markets.
How Does the January Effect Work?
When the January Effect did work, three possible causes were proposed.
What It Means for Individual Investors
In recent years, the January Effect has been inconsistent for U.S. stock markets. It’s possible the effect lives on in other asset classes or in less developed markets where the market is less efficient (as it once was in small U.S. stocks), but scholars report inconclusive findings.
1. Profit-taking
You might have forgotten this, but the stock market just had two really high-returning years in a row. In 2020, the S&P 500 gained 16%, even though it was the first year of the pandemic. A lot of internet stocks put up great numbers. Many stocks in many sectors were hammered, but overall, the market did just fine.
2. Tax planning
Traders often like to wait until January to sell stocks, and there's a reason for that. When you sell shares at a profit, the next year, come April 15, you have to pay taxes on your capital gains. By selling in January, you extend the period you have before that tax bill comes due -- in this case, until April 15, 2023.
3. What about omicron? Or the possibility that Russia might invade Ukraine? Or rising interest rates?
When it's not clear why the market is falling, all you can do is speculate. Some pundits thought that fears about the possible economic impacts of the omicron surge were causing traders to bid stocks down. Others pointed to the possibility of war in Ukraine.
History of The January Effect
What Causes The January Effect?
- It's been said that tax planning is a major driver of the January Effect. According to this hypothesis, investors sell off underperforming stocks in December to lock in a capital lossfor the year, thereby reducing their tax bill, which causes a temporary dip in prices. In January, prices recover when buying picks up again. Another potential driver ...
How to Prepare For The January Effect as An Investor
- Because the January Effect only occurs in certain contexts and appears to only have a modest impact in current markets, there are few ways to prepare. If you hold small-cap stocks in your taxable brokerage account, perhaps you could make periodic additions in December in anticipation of a possible January price increase. Should that happen, you'd have a chance to loc…
Omicron Supply Chain Issues
QE Winding Down
- Another fairly obvious high-risk factor for Wall Street is the Federal Reserve going on the offensive against inflation. As a reminder, the Consumer Price Index for all Urban Consumers (CPI-U) rose 6.8% in November, which marked a 39-year high for inflation. Earlier this month, Federal Reserve Chairman Jerome Powell announced that the nation's central bank would expedite the winding d…
Margin Calls
- Wall Street should also be deeply concerned about rapidly rising levels of margin debt, which is the amount of money that's been borrowed by institutions or investors with interestto purchase or short-sell securities. Over time, it's perfectly normal for the nominal amount of outstanding margin debt to climb. But since the March 2020 low, the amount of outstanding margin debt has come …
Sector Rotation
- Sometimes, the stock market dives for purely benign reasons. One such possibility is if we witness sector rotation in January. Sector rotationrefers to investors moving money from one sector of the market to another. On the surface, you'd think a broad-based index like the S&P 500 wouldn't be fazed by sector rotation. But it's no secret that growth...
Meme Stock Reversion
- A fifth reason the stock market could crash in January is the potential for a dive in meme stocks, such as AMC Entertainment Holdings and GameStop. Even though these are grossly overvalued companies that have become detached from their respectively poor operating performances, the Fed noted in its semiannual Financial Stability Report that near- and long-term risks existwith th…
valuation
- Even though valuation is rarely ever enough, by itself, to send the S&P 500 screaming lower, historic precedents do suggest Wall Street may be in troublecome January. As of the closing bell on Dec. 21, the S&P 500's Shiller price-to-earnings (P/E) ratio was 39. The Shiller P/E takes into account inflation-adjusted earnings over the past 10 years. Though the Shiller P/E multiple for th…
History Makes Its Presence Felt
- Lastly, investors can look to history as another reason to be concerned about the broader market. Since 1960, there have been nine bear market declines (20% or more) for the S&P 500. Following each of the previous eight bear market bottoms(i.e., not including the coronavirus crash), the S&P 500 underwent either one or two double-digit percentage declines in the subsequent 36 months…