The January effect pertains to the stock rally usually observed during the first month of the year. These are some of the reasons attributed to this:
- Investors sell off their stocks in December to create losses to offset some of their gains for the year. They do this to reduce taxes. Investors start buying again in January which leads to a rally.
- During the holidays, people are busy with holiday-related activities such as shopping, partying, vacationing, etc. People also use most of their available funds for holiday spending. In January, people may be more focused on the market. Those who experienced spending “fatigue” may use their available funds to invest instead when January comes.
- People who “promise” to themselves that they will start investing will likely do so at the start of the year. After all, “New Year’s resolutions” are executed in January. This is the time when people start doing responsible activities such as exercising, dieting, taking up a new hobby, organizing stuff… and investing.
- Investors tend to be optimistic at the start of the year. This optimism leads to a rally.
Start watching the markets, and you might just catch a rally.