January Effect

Categories: Financial Theory

See: Santa Claus Rally.

Late in December, when many of us are running around returning gifts and eating the last of the cookies, some investors use that time to sell off a bunch of stock to help offset any capital gains taxes they might have to pay the following year.

Hey, we all celebrate the year’s end in different ways.

Anyway, come January, those same investors might decide to start buying stock again; if enough of them do it in a short enough period of time, the market can see a little bounce right there in the beginning of the year. This is what’s called the “January effect,” and though we’ve actually seen it happen many times throughout history, it’s still considered hypothetical, since some argue that what we’ve seen can be explained by other factors.

For example, some say investors get kind of a “New Year, New Me” mentality in January, and get all amped to start their year off financially strong. Others say that the bounce can be attributed to people investing year-end bonuses. But regardless, most experts agree that the January effect, if it exists, happens sporadically at best, and is more common in some markets than others.

Long story short: it’s an interesting idea, but it should in no way, shape, or form be considered a reliable investment strategy.

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Finance: What are January Effect and San...3 Views

00:00

Finance allah shmoop what are the santa claus rally and

00:05

the january effect Well we actually attended a santa claus

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rally last december the energy in the arena was off

00:13

the charts Who knew elves could be that loud Yeah

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really Ok so in finance land a santa claus rally

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is well something else it refers to a rally or

00:25

rise in stock prices during the month of december and

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they don't even need magical reindeer Teo you know achieve

00:32

lift off Why december Because according to you our desk

00:35

calendar december is the last month of the year on

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for a whole bunch of tax and accounting reasons there

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are trades that need to happen before the end of

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the calendar year like professional funds need to have a

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certain minimum amount invested in the stock market rather than

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holding cash or there was some huge hot stock that

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they want to show that they at least own for

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pa art of the year so they buy it in

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december and all investors want to sell their losers either

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for the tax loss or just because they don't want

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those on their annual report that they owned a million

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Shares of dog crap dot com so because everything is

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better with acute see name attached well this onslaught of

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activity has been termed the santa claus rally and generally

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there is more buying than selling as optimism generally beats

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pessimism this time of year So historically stocks have gone

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up right around christmas All right so what about the

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january effect Well because all the buying has bought up

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the quote loose unquote shares in the market place or

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rather the nervous nellies who kind of sort of wanted

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to sell their shares have now sold them While there

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simply isn't the supply of shares at lower prices available

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for buyers to buy and so with the same demand

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unless supply prices go up yeah eq on one first

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week and to boot Yeah there's typically an increase in

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stock prices after new year's which financial gurus have lovingly

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named the january effect Or as mrs claus calls at 00:02:05.17 --> [endTime] santa's recovery period No

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