The January effect is a hypothesis that there is a

seasonal A season is a division of the year based on changes in weather, ecology, and the number of daylight hours in a given region. On Earth, seasons are the result of the axial parallelism of Earth's axial tilt, tilted orbit around the Sun. In temperat ...

anomaly in the

financial market A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial marke ...

where securities' prices increase in the month of January more than in any other month. This

calendar effect A calendar effect (or calendar anomaly) is the difference in behavior of a system that is related to the calendar such as the day of the week, time of the month, time of the year, time within the U.S. presidential cycle, or decade within the cent ...

would create an opportunity for investors to buy

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s for lower prices before January and sell them after their value increases. As with all calendar effects, if true, it would suggest that the market is not efficient, as market efficiency would suggest that this effect should disappear. The effect was first observed around 1942 by investment banker Sidney B. Wachtel. He noted that since 1925 small stocks had outperformed the broader market in the month of January, with most of the disparity occurring before the middle of the month. It has also been noted that when combined with the four-year US presidential cycle, historically the largest January effect occurs in year three of a president's term. The most common theory explaining this phenomenon is that individual investors, who are

income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...

-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. Another cause is the payment of year-end bonuses in January. Some of this bonus money is used to purchase stocks, driving up prices. The January effect does not always materialize; for example, small stocks underperformed large stocks in 1982, 1987, 1989 and 1990.

Criticism

Burton Malkiel Burton Gordon Malkiel (born August 28, 1932) is an American economist, financial executive, and writer most noted for his classic finance book ''A Random Walk Down Wall Street'' (first published 1973, in its 13th edition as of 2023). Malkiel i ...

asserts that seasonal anomalies such as the January Effect are transient and do not present investors with reliable

arbitrage Arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more marketsstriking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which th ...

opportunities. He sums up his critique of the January Effect:Burton, Malkiel: Efficient Market Hypothesis and Its Critics, The Journal of Economic Perspectives 17 (2003) pp. 64. Available at: http://www-stat.wharton.upenn.edu/~steele/Courses/434/434Context/EfficientMarket/malkiel.pdf

Wall Street traders now joke that the January effect is more likely to occur on the previous Thanksgiving. Moreover, these nonrandom effects (even if they were dependable) are very small relative to the
transaction cost In economics, a transaction cost is a cost incurred when making an economic trade when participating in a market. The idea that transactions form the basis of economic thinking was introduced by the institutional economist John R. Commons in 1 ...
s involved in trying to exploit them. They do not appear to offer
arbitrage Arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more marketsstriking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which th ...
opportunities that would enable investors to make excess risk adjusted returns.

References

{{DEFAULTSORT:January Effect Behavioral finance Calendar effect

Criticism

See also

References