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 tilted orbit around the Sun. In temperate and po ...

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 market ...

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 any market anomaly, different behaviour of stock markets, or economic effect which appears to be related to the calendar, such as the day of the week, time of the month, time of the year, time within the ...

would create an opportunity for investors to buy stocks 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 Capital loss is the difference between a lower selling price and a higher purchase price or cost price of an eligible Capital asset, which typically represents a financial loss for the seller. This is distinct from losses from selling goods below ...

) 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.

Alternative meaning

The

January barometer The January barometer is the hypothesis that stock market performance in January (particularly in the U.S.) predicts its performance for the rest of the year. So if the stock market rises in January, it is likely to continue to rise by the end of ...

("As goes January, so goes the year") is sometimes called the January effect.

Criticism

Burton Malkiel Burton Gordon Malkiel (born August 28, 1932) is an American economist and writer most noted for his classic finance book '' A Random Walk Down Wall Street'' (first published 1973, in its 12th edition as of 2019). He is a leading proponent of the e ...

asserts that seasonal anomalies such as the January Effect are transient and do not present investors with reliable arbitrage opportunities. He sums up his critique of the January Effect by stating that "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 and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pro ...

s involved in trying to exploit them. They do not appear to offer arbitrage opportunities that would enable investors to make excess

risk adjusted return In finance, the Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) measures the performance of an investment such as a security or portfolio compared to a risk-free asset, after adjusting for its ...

s."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

References

{{DEFAULTSORT:January Effect Behavioral finance Calendar effect

Alternative meaning

Criticism

See also

References