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.
What are the trends in the stock market in January?
January Stock Market Trends 1 January Effect. Think of the "January effect" as an after-the-holidays stock market sale. ... 2 Disappearing Effect. Some believe the January effect is waning as more investors hop on the bandwagon and leave fewer bargains. 3 January Barometer. ... 4 First Five Days. ...
Is January a good time to invest in stocks?
A good start in January may mean investors are ready to get into the market, which will cause it to climb. Not everyone buys into this idea, including Lu. He said the historical observations are interesting, but unreliable.
Why do stocks drop in January?
This is driven by heavy selling during December and aggressive buying during January, particularly early in the month. Investors tend to sell off low-performing stocks at the end of each year. They then tend to buy those stocks back a few weeks or even days later. What Causes the January Effect?
What is the January stock market sell-off?
The term refers to the rush to buy stocks in January -- often for a discount. Investors sell for tax purposes or just to make some quick holiday cash. The December sell-off creates stock market discounts in January. The trend is most pronounced in small-cap stocks.
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.
Why is the January effect less important?
Another reason analysts consider the January Effect less important as of 2018 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.
Why is the January effect so small?
He also suggests that the January Effect is so small that the transaction costs needed to exploit it essentially make it unprofitable. It's also been suggested that too many people now time for the January Effect so that it becomes priced into the market, nullifying it all together.
What is the January effect?
The January Effect is a hypothesis, and like all calendar-related effects, suggests that the markets as a whole are inefficient, as efficient markets would naturally make this effect non-existent. The January Effect seems to affect small caps more than mid or large caps because they are less liquid.
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.
What is the January effect?
The January Effect is a theory which says that every December stock prices take a dip and every January they receive a boost. This is driven by heavy selling during December and aggressive buying during January, particularly early in the month. Investors tend to sell off low-performing stocks at the end of each year.
Why do investors sell stocks at a loss?
The January Effect is driven by tax planning. Investors sell off stocks at a loss before the end of each year to try and mitigate their upcoming capital gains taxes. Once the calendar rolls over, they buy those stocks back to hold for another year of (hopeful) gains.
What was the Dow Jones Industrial Average in 2019?
Just as one example, in 2019/2020 the Dow Jones Industrial Average fluctuated from 28,645.26 on December 27 to 28,462.14 on December 30 back to 26,868.80 on January 2. This is a small margin of movement, all within approximately 400 points, but it obeys the rules that the January Effect tells us to expect.
Is the January effect still pronounced?
The January Effect no longer appears as pronounced as it was in the mid -20th century, when it was first documented . However some data still supports the idea of a December /January fluctuation to a certain degree.
What is the January effect?
Some have pointed to a pattern of smaller stocks outperforming large ones, but others believe the January Effect is more accurately ascribed to generally depressed stocks regardless of company size.
Did the S&P 500 rise in January?
As can be seen in the table, the S&P 500, DAX 30 and the SSE have seen their price rise in January in ten of the last 20 years, the FTSE 100 seven, and the Nikkei 225 six, although all of these assets had seen a January rise in 2019.
When is the best time to buy stocks?
If Monday may be the best day of the week to buy stocks, Friday may be the best day to sell stock—before prices dip on Monday. If you're interested in short-selling, then Friday may be the best day to take a short position (if stocks are priced higher on Friday), and Monday would be the best day to cover your short.
What is the shortest time frame for trading?
Day trading , as the name implies, has the shortest time frame with trades broken down to hours, minutes, and even seconds, and the time of day in which a trade is made can be an important factor to consider.
What is the opening hour?
The opening hours are when the market factors in all of the events and news releases since the previous closing bell, which contributes to price volatility. A skilled trader may be able to recognize the appropriate patterns and make a quick profit, but a less skilled trader could suffer serious losses as a result.
What time is the best time to trade?
The whole 9:30 a.m. to 10:30 a.m. ET period is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time.
Is September a down month?
September is traditionally a down month. The average return in October is positive historically, despite the record drops of 19.7% and 21.5% in 1929 and 1987. 3 The chart below shows the monthly average returns for the S&P 500 over the period 1950 through 2017:
Is the first day of the workweek the best day?
Still, people believe that the first day of the workweek is best. It's called the Monday Effect.
Is there a day of every month that is good for buying stocks?
There is no single day of every month that's always ideal for buying or selling. However, there is a tendency for stocks to rise at the turn of a month. This tendency is mostly related to periodic new money flows directed toward mutual funds at the beginning of every month.
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…
What Is The January Effect?
Understanding The January Effect
- The January Effect is a hypothesis, and like all calendar-related effects, suggests that the markets as a whole are inefficient, as efficient markets would naturally make this effect non-existent. The January Effect seems to affect small capsmore than mid or large caps because they are less liquid. Since the beginning of the 20th century, the data suggests that these asset classes have …
January Effect Explanations
- Beyond tax-loss harvesting and repurchases, as well as investors putting cash bonuses into the market, another explanation for the January Effect has to do with investor psychology. Some investors believe that January is the best month to begin an investment program or perhaps are following through on a New Year's resolution to begin investing for the future. Others have pontif…
Studies and Criticism
- An ex-Director from the Vanguard Group, Burton Malkiel, the author of A Random Walk Down Wall Street, has criticized the January Effect, stating that seasonal anomalies such as it don't provide investors with any reliable opportunities. He also suggests that the January Effect is so small that the transaction costs needed to exploit it essentially make it unprofitable. It's also been suggest…