We hope that you have all set your 2018 off on the right foot – by including lots of new investment research, of course! If you have already started your new year’s investment research, you may have come across a hypothesis that many investment professionals call “the January Effect.” Seems pretty timely, doesn’t it? But, what exactly is this January Effect? In this article, we will explain the effect and some commonly held viewpoints that surround the hypothesis, so that you can be on the lookout as your investment research continues this month.
The January Effect has been defined by some investors as a seasonal increase in stock prices that occurs during the month of January. Analysts believe that this effect typically occurs as a result of increased buying at the beginning of each new year. This means that the January Effect can be considered a “calendar-related effect” – or an effect that results from fluctuations in investors’ willingness to buy or sell their investments at different times in the year. We can compare this reaction to that a very similar effect that we typically see during the summer when it is believed that investors’ willingness to buy securities increases as a result of the warm weather and generally positive sentiment.
But, for many of us, January is among the coldest months of the year and also signifies the return to work for many regular investors. So, what factors might cause the sudden increase in investors’ willingness to purchasing shares?
Some analysts have hypothesized that investors typically sell off shares in December to avoid a tax-loss on their investments. Others have guessed that this phenomenon might be a result of the year-end bonuses that many investors receive from their jobs at the end of each calendar year, which they might promptly put into investments after the holidays end. Finally, some analysts have guessed that investors may truly be working on their New Year’s resolutions and may start investing right at the beginning of each new year. Regardless of the cause, analysts who have seen the January Effect in action argue that it is a result of investor psychology, rather than just pure market causes.
As a result of the January Effect, some analysts have recommended that investors consider making new investments at the turn of each year – especially in small and mid-cap stocks, which have typically seen the most price fluctuations. Obviously, these analysts expect to see the prices of many securities rise over the month of January, meaning that investors might profit from the positive psychology of the season.
On the other hand, though, some studies have tried to show that the January Effect should not be seen as a reason to jump into the markets. For example, some analysts have been quick to point out that seasonal anomalies are not reliable opportunities because investors can never be sure of the degree to which they will occur – or if they will even occur at all. Others have stated that the January Effect is becoming increasingly less prominent as the years go by. These analysts argue that investors have been selling their investments in December less frequently in recent years than ever before, because of the ability to shelter their investments from taxes in other ways. Many analysts also take the stance that the markets can correct themselves and therefore point out that it is possible that the markets have adjusted to compensate for the January Effect over time. Finally, some investors have noticed that, where the January Effect exists, its added value might be so small that it becomes negligible when transaction costs are included.
But, what does this mean for your January? If you, like many investors, are excited by the prospect of improving your investing habits this new year, you may consider reading up on the potential existence of the January Effect. Read the many stances that exist on this hypothesis and act in whichever way you think works best for your portfolio! Finally, try to make improving your investment research part of your New Year’s resolution. You already know the immense value that good research can create!