january effect

The January effect (somtimes called "year-end effect") is an unexplained financial phenomenon of most stock markets having significantly higher returns in January than in other months of the year. This effect has been observed in most countries and in various markets, including share, bond and commodity markets. This strength of the effect varies depending on company size and other factors. One possible explanation is tax loss selling by investors of poorly performing stocks to capture the capital gain (though this doesn't explain why the effect is observed in countries like Australia that have a different tax year). Another explanation is that the ratio of buys to sells for financial institutions drops significantly in days before the end of the year, pushing down the prices. While this may be true, there is no explanation for this behavior and no explanation of why other investors do not take advantage of this. Possibly some irrational human personality factors account for the natural optimism at the beginning of the New Year, although this may sound unreasonable in a world of precalculated transactions. In the last couple of years, after the January effect became widely known to the public, it has become less pronounced and has started shifting to December causing a rise in stock prices, known as a Santa Claus rally.

January Effect

See also