# January Effect: What It Is in the Stock Market, Possible Causes

Is the 'January Effect' a Tradable Seasonal Strategy?

![January Effect: The supposed tendency of stock prices to rise in the first month of the year.](https://www.investopedia.com/thmb/uU-IUHjFOEVf6uURQVQ0-AC4e4g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/januaryeffect.asp-final-460dd3008b184f759e4001a29d1d49dc.png)

*— Investopedia / Tara Anand*

> **Definition**
>
> The January effect is the supposed increase in stock prices in the first month of the year.

The January effect is the name given to the belief in a seasonal increase in stock prices in the first month of each year. People have generally attributed a supposed rally each January to the rise in buying that follows the price drop that typically happens each December. However, data for this phenomenon over the last several decades has proven inconclusive.  

### Key Takeaways

*   The January effect is the supposed seasonal tendency for stocks to rise in the first month of the year.
*   The January effect is said to occur when investors sell losing stocks in December for tax-loss harvesting and repurchase them after the New Year.
*   Like other market anomalies and calendar effects where sentiment and nonrational motives appear at work, the January effect is considered by some as evidence against the efficient markets hypothesis.

The argument for the effect is that at the end of each year, investors tend to sell off securities at a loss to offset their capital gains and lower their tax bills, prompting a sell-off. After the New Year, they repurchase the stocks, creating a greater demand for a range of shares in the market, leading to the January effect. Another explanation for the phenomenon is that investors use year-end cash bonuses to buy investments the following month.

While this market anomaly has been identified in the past, the January effect has disappeared in recent years, if it ever existed, and studies of previous eras have shown it correlated less with lower prices in December than with continuing bullishness during the last months of the previous year. In short, the evidence doesn't seem to match the explanations.

Rebecca Walser, named by Investopedia as a top advisor for 2023, doesn't think there's much to the theory. But, she added, if there's anything to it, she would "attribute it much more to human psychology than tax loss harvesting or mutual fund window dressing."

Another Investopedia top advisor, [Preston D. Cherry](https://www.investopedia.com/preston-cherry-7553785), agrees with Walser, calling it little more than "a folktale." But Cherry said there was much to learn from the supposed "effect": "Investors must follow a disciplined and tailored investment strategy unique to their goals, risk tolerance and capacity," he told Investopedia. "The best long-term investment strategies have a consistent commitment and a why attached to the action rather than following the herd."  

## Understanding the January Effect

Investment banker Sidney Wachtel is said to have first noticed the January effect in 1942. Like all calendar-related effects, the hypothesis suggests that the markets are inefficient since efficient markets would naturally make this effect disappear.

Our own look back at the SPDR S&P 500 ETF ([SPY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SPY)) since its 1993 inception makes one wonder how the term ever came to be used. Of the 31 years since, there have been 18 winning January months (58%) and 13 losing January months (42%), making the odds of a gain slightly higher than the flip of a coin. Further, from the start of the 2009 market rally through January 2024, January months showed eight positive vs. eight losing months, a 46% to 54% ratio. Given the strong rally since 2009, one might rightly expect a more pronounced number of January winners, but this has not been the case.

The first month of the year turns out not to be a particularly compelling trading month out of the year, with middling performance at best. Historically, according to data cited by Nasdaq, it's been in positive territory but ranks eighth out of the 12 months over the last 20 years.

> **Tip**
>
> The efficient market hypothesis argues that share prices reflect all the information that is available to the market. Based on the theory, since all market participants have access to the same information, outperforming the market through stock selection or market timing is not practical. The efficient market hypothesis is an argument against seasonal phenomena like the January effect.

## January Effect Explanations

Besides tax-loss harvesting with post-New Year repurchases and investors putting cash bonuses into the market, another explanation for the January effect has to do with investor psychology. Some investors argue that January is the best month to begin an investment program or that many are following through on a New Year's resolution to begin investing for the future.

Others have posited that mutual fund managers buy the stocks of top performers at the end of the year and get rid of losing assets for the sake of appearances in their year-end reports, an activity known as "[window dressing](https://www.investopedia.com/terms/w/windowdressing.asp)." This is unlikely, however, since trading would primarily affect large caps, and the effect, when found, has been seen as greater in small caps.

Year-end sell-offs could attract buyers interested in the lower prices, knowing that the dips are not based on company fundamentals. On a wide enough scale, this could drive prices higher in January.

> **Tip**
>
> Jeffrey Hirsch, who took over editing the annual Stock Trader's Almanac for this father, who named many of the best known calendar effects (the Santa Claus rally, etc.), cautioned against being too literal in trading on the history of any of them. "They're not automatic," Hirsch says. "Buy this day, sell that day...You gotta see what's going on on the ground. You've got to do some homework."

## Studies on the January Effect

Studies on the January effect generally back Walser's view. The effect has long been one of the wider-known market anomalies, so it's no surprise that it's given rise to a wealth of studies. A look back should give us some humility when citing truisms about the market—like the dumping of stocks in December leads to a bullish market in January—that have become outdated or might have been misidentified by previous researchers in the first place. For example, as we've seen, it's never been clear that sell-offs in December led to purchases in January since the better-traded January months correlate to better December trading months, not those that had massive sell-offs.

Early research by Rozeff and Kinney highlighted that this stock market's seasonal anomaly could be linked to patterns in investor behavior, such as tax-loss selling in December followed by reinvestment in January.

Later, Keim expanded on this idea, suggesting that institutional window-dressing and individual tax strategies played a role, particularly for small cap stocks. Additionally there was Haugen and Jorion who compounded the narrative by associating the January Effect with behavioral finance factors like overreaction and seasonal portfolio adjustments.

Subsequent studies have reinforced and broadened the industry's understanding of the January Effect. In 2005, Haug and Hirschey found that the anomaly persisted even after the Tax Reform Act of 1986, indicating that other drivers beyond tax-related behavior could be influencing the effect. Lakshya Batta explored the phenomenon's global consistency and suggested additional explanations such as performance hedging and seasonal liquidity. Furthermore, research published delved into cross-sectional impacts, demonstrating that sentiment driven stocks earned higher returns in January, supporting the behavioral finance argument.

Indeed, the January Effect is not confined to the US, as Tyler Folliott's global study showed. While the effect was significant in some markets, it varied globally, with other anomalies, like a September Effect, also emerging.

In this world of finance and investing the January Effect remains a fascinating and complex market anomaly that continues to evolve under the influence of investor behavior and market dynamics.

## Criticisms of the January Effect

January effect skeptics have primarily focused on the lack of recent data showing its continuing impact, problems identifying its causes, and how it's become moot given the evolution of financial markets. Let's take these in turn:

*   **Diminishing significance**: Most studies show that the January effect has become less pronounced. Other than suggesting the effect wasn't real to begin with, one idea is that as investors became aware of this trend, they adjusted their strategies accordingly, which decreased its influence over time. This suggests that the January effect may be more of a historical anomaly than a reliable market indicator.
*   **Impact of market efficiency**: The efficient market hypothesis argues that it is impossible to outperform the stock market because the market will "catch up" to reflect all relevant information. Momentary anomalies are just that, and this is more so with the advent of high-frequency trading and sophisticated algorithms that would exploit and correct for the January effect if it existed.
*   **The effect is related to small-cap stocks**: Some have sought to rescue some form of the January effect by pointing to this or that part of the market as having data to back it up. Several studies have observed the effect in small-cap stocks, which are generally more volatile and riskier. This raises questions about the broader applicability of the effect across different market segments and whether one can make any risk-adjusted returns exploiting it.
*   **Problems with the tax-loss harvesting hypothesis**: Some have argued that the January effect results from investors selling securities at a loss in December for tax purposes, then buying them back in January, artificially inflating prices. Critics point out that this behavior is inconsistent each year, though the tax conditions are and would vary for individual traders anyway, given their specific tax situations and broader economic conditions.
*   **Changing market dynamics**: Financial markets continually evolve with new investment instruments, regulations, and investor behavior. These changes can render past patterns like the January effect if they existed, obsolete as new dynamics emerge that were not present during the times when the effect was first observed. For example, while it could be that tax-loss harvesting made sense over previous periods, individual retirement accounts and other tax shelters make pocketing such losses at the end of the year largely a thing of the past for many investors.

## Is there Still a January Effect?

While the January Effect remains an interesting historical phenomenon, it appears that its relevance in modern markets has wanted, and investors are advised to consider other factors when making investment and trading decisions.

## Can You Make Money Exploiting the January Effect?

Unlikely. Even if the January effect were real (it's probably not) and markets were to rise uncharacteristically each January, the fact that people may try to exploit this would undermine its appearance. For example, in anticipation of higher prices in January, some would move in December to pick up certain assets. But that demand itself would lessen the price changes between before and after the New Year.

## What Other Months Are Said To Have Effects?

Besides the supposed January effect, there are other monthly phenomena said to be observed in the stock market, although they are less prominent. For instance, the "[Sell in May and Go Away](https://www.investopedia.com/news/truth-about-sell-may-and-go-away/)" strategy is based on the supposed historical underperformance of stocks in the period from May to October. Another is the "December effect," where stock prices often increase in December, possibly due to tax-related trading, holiday spending, or investor optimism. In addition, the "October effect" was once said to be a real market anomaly since investors were said to fear market declines that month, partly because of historical market crashes in 1929 and 1987. One month does consistently stick out: September. Over 10 and 20-year time frames, as well as the period going back to 1950, it has been consistently the worst month for trading.

## What Is the January Barometer?

The [January barometer](https://www.investopedia.com/terms/j/januarybarometer.asp), also called "the other January effect," is a folk theory of the stock market claiming that the returns in January will predict the stock market's overall performance for that year. Thus, a strong January would predict a bull market and a down January would augur a bear market. Actual evidence for this effect is scant.

## The Bottom Line

The January effect is a market theory suggesting that January often has consistent gains, though the evidence for it has been elusive in recent decades. Despite this, market commentators frequently cite it to explain any positive performance in January. They often link January's buying activity to post-year-end tax-loss sales. However, the relevance of this rationale has greatly diminished over time as more investors shift to tax-sheltered plans like [401(k)s](https://www.investopedia.com/terms/1/401kplan.asp).

Traders are advised to approach the January effect skeptically and focus on the prevailing market conditions as the year turns rather than relying on this increasingly questionable market lore.

> **Article Sources**
>
> 1.  A. K. Cheema, et al. "[The Cross-Section of the January Effect](https://link.springer.com/article/10.1057/s41260-023-00324-1#citeas)." _Journal of Asset Management_. Vol. 24 (2023). Pages 513–530. 
>     
> 2.  Nasdaq. "[Will January 2024 Be a Good Month for U.S. Stocks?](https://www.nasdaq.com/articles/will-january-2024-be-a-good-month-for-u.s.-stocks)"
>     
> 3.  Lisa R. Anderson et al. "[Yes, Wall Street, There Is a January Effect!](https://economics.wm.edu/wp/cwm_wp15.pdf)." College of William and Mary working papers. (March 2005.) Page 1.
>     
> 4.  Yahoo Finance. “[S&P 500 (SPY).](https://finance.yahoo.com/quote/SPY?p=SPY)”
>     
> 5.  _Wall Street Journal_. "[The ‘January Effect’ Doesn’t Hold Up With Stocks. But Bonds Are a Different Story](https://www.wsj.com/articles/january-effect-stocks-bonds-11641659229)."
>     
> 6.  M. Pompian. "Behavioral Finance and Your Portfolio." John Wiley & Sons, 2021. Pages 20-23.
>     
> 7.  Rozeff, M. S., & Kinney, W. R. (1976). _Capital market seasonality: The case of stock returns_. Journal of Financial Economics, 3(4), 379-402
>     
> 8.  Source: Haugen, R. A., & Jorion, P. (1996). _The January effect: Still there after all these years_. Financial Analysts Journal, 52(1), 27-31
>     
> 9.  Keim, D. B. (1983). _Size-related anomalies and stock return seasonality: Further empirical evidence_. Journal of Financial Economics, 12(1), 13-32
>     
> 10.  Haug, Mark and Hirschey, Mark, [The January Effect (November 2005)](http://dx.doi.org/10.2139/ssrn.831985). Available at SSRN: [https://ssrn.com/abstract=831985](https://ssrn.com/abstract=831985) or [http://dx.doi.org/10.2139/ssrn.831985](https://dx.doi.org/10.2139/ssrn.831985)
>      
> 11.  Batta, L. (2023). [_The January Effect Calendar Anomaly: An Empirical Analysis_.](https://ijournals.in/wp-content/uploads/2023/10/4.IJSRC-111004-Lakshya.pd) International Journal of Scientific Research and Review, 11(10).
>      
> 12.  Journal of Asset Management. (2023). [_The cross-section of January Effect_](https://link.springer.com/article/10.1057/s41260-023-00324-1).
>      
> 13.  Folliott, T. (2007). [_The January Effect: A global perspective_.](https://www.academia.edu/73327343/The_January_effect_a_global_perspective)
>      
> 14.  Anthony Gu. “[The Declining January Effect: Evidence From the U.S. Equity Markets](https://www.sciencedirect.com/science/article/abs/pii/S1062976902001606).” _The Quarterly Review of Economics and Finance._ 43.2 (2003). Pages 395-404.
>      
> 15.  Burton G. Malkiel. “[The Efficient Market Hypothesis and Its Critics](https://pubs.aeaweb.org/doi/pdfplus/10.1257/089533003321164958).” _Journal of Economic Perspectives._ 17.1 (2003). Pages 62-63.
>      
> 16.  Nasdaq. “[What Is the January Effect? And How It Can Boost Small-Caps in 2023](https://www.nasdaq.com/articles/what-is-the-january-effect-and-how-it-can-boost-small-caps-in-2023).”
>      
> 17.  Brett Bennett. “[Outperforming the Stock Market Using Market Anomalies](https://scholarworks.uark.edu/cgi/viewcontent.cgi?article=1110&context=finnuht).” University of Arkansas working paper. (2023). Pages 3-4.
>      
> 18.  George Smith. "[January Seasonality: Have Returns Pulled Forward?](https://www.lpl.com/research/blog/january-seasonality-have-returns-been-pulled-forward.html)" LPL Research. (Dec. 29, 2023.)
>      
> 19.  Ben R. Marshall, Nuttawat Visaltanachoti. "[The Other January Effect: Evidence Against Market Efficiency?](https://www.sciencedirect.com/science/article/abs/pii/S0378426610001251)" _Journal of Banking and Finance_. 34.10 (2010). Pages 2413-2424.