New year, new start? That’s what many believe. It’s the month when people start their New Year’s resolutions for the best possible start to a new calendar year.
“The January Effect” also comes into play in investing. But what exactly is it, and is it still true?
What is “The January Effect”?
“As goes January, so goes the year” is the premise of The January Effect in investing. The idea is that the way a stock performs in January indicates how it will perform throughout the year.
It was in 1942 that investment banker Sidney B. Wachtel first observed The January Effect, based on data back to 1925.
What causes The January Effect?
Over the years, there have been various suggestions as to what causes The January Effect. One is that investors sell their underperforming stocks towards the end of the year to reduce tax liabilities, reinvesting the next year. Another is that employees receive January bonuses which they then use to buy stocks, driving up prices.
Some believe that the reasoning is partly psychological: the concept of “starting afresh” at the beginning of the year applies to stock purchases as well as other aspects of life.
Does The January Effect still work?
Various studies have been conducted in previous years that suggest that The January Effect can work – especially for small-cap stocks compared to their larger counterparts. However, this is far from guaranteed. Since the effect was first observed, the world of investing has changed. The number of products – including tax-efficient products – on the market has grown, and this seasonal effect has waned in recent years. Many investors choose not to hinge their decisions on The January Effect, instead using other tactics to decide how to proceed.
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