January Effect

TOP CONTRIBUTORS

George Michaelides

The January effect can be characterized as a landmark for Wall Street. It is a seasonal phenomenon that portrays the positive perceptions - outlook investors have about the stock exchanges performances. It is an effect that renders January as a special month of each year in investors' eyes.

Specifically, January effect is Wall Street's tendency to demonstrate a rising performance between December 31 and the end of the first week in January. The rationale of this is based in investors' hopefull-optomistic expectations as the new year enters - something like a wish for the new year for markets to better perform - in the one hand and on the other hand, it is based on the fresh capital inflow coming from hedge funds managers, in their attempt to attain an efficient financial position in order to "meet" and harness the new year's opportunities toward the stock performances.

Some other theories suggest that this phenomenon occurs because many investors choose to sell some of their stock right before the end of the year in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st these same investors quickly reinvest their money in an attempt to put their money back to work in the market, causing stock prices to rise.

Moreover, the January effect has another characteristic; stocks of low capitalization tend to outperform stocks of higher capitalization in January. More specifically, studies have shown that from the year 1953 to 1995 inclusive, stocks of low capitalization outperformed stocks of higher capitalization for 40 years out of a total of 43 years. Despite the fact that the January effect started to unbrace in some of the years following 1995, nowadays the phenomenon further evolved as the aforementioned tendency of low capitapization stocks performance in American markets demonstrated a high perormance from mid-december of each year.