Stock Trading: What is the “January Effect”?

What is it and where does the phenomenon known as originate from “January effect”? He explains it Freedom Finance Europe in a long analysis in which it is underlined that it is one of the best known market anomalies, also called calendar anomaly because it concerns a precise moment of the year, that is, its beginning: the month of January.

But what are we referring to with the term anomaly, associated with stock trading? In fact, we are talking about performances (of securities) and/or movements (of prices) that are different from those expected. The market is constantly evolving, but some behaviors – more or less recurring – may represent exceptions within the usual trends observed.

Stock Trading: What is the January Effect?

The January effect is considered an anomaly due to the perceived increase in stock prices, compared to other months of the year. “This is generally due to an increase in the number of buyers who follow the decline in prices, which usually occurs in December, when investors commit to harvesting tax losses to offset the income made, causing a sell-off, i.e. an immediate sale. Another possible explanation could be that investors use year-end bonuses to purchase investments the following month,” he said. Francesco Bergamini, Representative in Italy of Freedom Finance Europe, an international online broker company and the only European broker listed on the NASDAQ.

Analysis of recent years: what the market tells us

Exist data supporting the January effect. For example, a study by the investment company S&P Dow Jones Indices found that since 1928 the average return of the S&P 500 (US market) index in January has been 3.2%. This value stands out compared to an average return of 1.1% recorded in the other 11 months of the year.

However, Bergamini continues: “It is worth underlining that the January effect is not guaranteed: there have been many cases where the S&P 500 index fell in January. Furthermore, the January effect appears to be more evident in small-cap stocks than in large-cap stocks.”

On the other hand, although the January effect is a real and demonstrable market phenomenon, there is no guarantee that it will actually occur in any given year. Over the last 30 years, January profits have been observed in the US market 17 times (57%), while January months with losses have been 13 (43%).

Between strategy and risks

Investing in anticipation of the January effect can be one valid tactic for some investors, but it is worth underlining that this strategy involves some risks and uncertainties. “In fact, it is based on an anomaly of market that may not occur every year and, like all investment strategies, it should be used as part of a diversified portfolio rather than relying exclusively on it” concluded Francesco Bergamini, Representative of Freedom Finance Europe in Italy.