January is a time for celebrations, resolutions, and the annual tradition of dragging a browning spruce tree out to the garbage can. Often, it can also trigger a small bump in stock market returns—a phenomenon that has been observed for decades.
The “January Effect”
In the investing world, this phenomenon is referred to as the “January Effect”—a rise in stock market indices that often occurs in January.
It’s a similar market phenomenon to the “Santa Claus Rally,” which is a seasonal stock market increase that can occur during the week after Christmas Day, December 25. Since 1950, there’s been a larger market gain during this period than we traditionally see during the January effect, with an average increase of 1.3%.
Sometimes, a Santa Claus rally can be a forerunner to the January effect, giving investors momentum heading into the new year.
Causes of the January Effect
As for what caused a rise in the markets during past Januaries, there isn’t a simple answer. Many financial experts speculate that a general sense of enthusiasm about a new year—similar to how you may feel about the prospect of getting fit around New Year’s, or the excitement surrounding any other resolution—is the root of the phenomenon.
Industry research points to high levels of investor activity during the first part of the month, too, which backs up this theory. Another popular view is that many investors are dumping losing investments at the end of December in order to claim a loss for tax reasons (a process called tax-loss harvesting). Then, they’re reinvesting again in January.
Should you bet on January?
While the January effect is a real, observed market phenomenon, there is no guarantee that it will actually occur in any given year. That’s why you may be better off sticking to a strategy of consistently investing small amounts at regular intervals.