January Effect

A phenomenon occurring at the end of the year when investors, starting to worry about taxes, sell some stocks that are down so the losses can be written off against capital gains. This selling causes stocks to go down near the end of the year and back up in January when investors buy back the stocks they sold.

The January effect is said to affect small-caps more than mid/large caps since it is assumed that a relatively small amount of tax-loss selling will still have a significant impact on a relatively small, thinly-traded company.

Tendency of the stock market to rise between December 31 and the end of the first week in January. The January Effect 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 the market, causing stock prices to rise.

Although the January Effect has been observed numerous times throughout history, it is difficult for investors to profit from it since the market as a whole expects it to happen and therefore adjusts its prices accordingly.

Another reason the January effect is considered a non-event is that more people are using tax sheltered retirement plans and therefore have no reason to sell at the end of the year for a tax loss. The January effect phenomenon, however, has not occurred in years because the markets have adjusted for the effect.

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