Since the mid-1940s, the S&P 500 index has averaged an increase of around 0.9% in October, 1.4% in November and 1.6% in December. Have you heard of the January Effect?
End-of-Year Data on the S&P500
Since 1945, the S&P500 index rose on 60% of the October months, 66% in the Novembers and a whopping 77% in the Decembers. Although, during the last decades, December has been a month signed by investors selling their losing assets to account for that loss on their tax returns.
What Is the January Effect?
The January Effect is a supposed increase in prices of stocks that happens every January. As mentioned, this rally may be attributed to an increase in buying, following the drop in price that typically occurs in December when investors try to 'harvest' tax losses to offset realized capital gains. Another possible explanation is that investors use their earned year-end cash bonuses to purchase financial securities the following month.
Beyond tax-loss harvesting and repurchases, as well as investors putting cash bonuses into the market, another explanation for the January Effect is investor psychology. For example, some investors believe January is the best month to begin an investment program or are following through on a New Year's resolution to start investing for the future.
However, this 'January Effect' isn't still running since it's widely known.
Can I Make Money Profiting from the January Effect?
Probably not. Even if the January Effect was a real consequence of the calendar, and financial markets were to rise uncharacteristically each January, the fact that people may try to use this for their benefit can undermine its consummation.