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 elusive 
some argue 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 12 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 1 in short the evidence doesn t seem to match the explanations understanding the january effectinvestment banker sidney wachtel is said to have first noticed the january effect in 1942 3 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 since its 1993 inception makes one wonder how the term ever came to be used of the 30 years since there have been 17 winning january months 57 and 13 losing january months 43 making the odds of a gain slightly higher than the flip of a coin 42 further from the start of the 2009 market rally through january 2023 january months showed seven positive vs seven losing months a 50 50 split 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 2the 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 explanationsbesides 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 3others 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 this is unlikely however since trading would primarily affect large caps and the effect when found has been seen as greater in small caps 5year 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 6rebecca walser named by investopedia as a top advisor for 2023 is skeptical that the theory has statistical validity but she adds if there s anything to it she would attribute it much more to human psychology than tax loss harvesting or mutual fund window dressing studies on the january effectstudies 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 2 my theory is that markets are inefficient enough to observe a january effect but i attribute it much more to human psychology than tax loss harvesting or mutual fund window dressing rebecca walser financial advisor on the january effectuntil the early 2000s most researchers accepted the january effect as an empirical fact focusing less on proving its existence and more on understanding its nuances such as its precise timing and varying degrees of impact over time were there parts of the month that packed the biggest punch 7 was there more or less of a january effect over time 7 given this acceptance some scholars began to explore whether the market was inherently riskier in january hypothesizing that the higher returns were a reward for those willing to invest during this period 8 others became interested in correlations between the january effect and any positive returns for the rest of the year alternatively some used the known fact of the january effect to prove a december effect which then gave rise to a whole other set of studies 910 still more moved beyond tax harvesting and traditional stock market explanations bringing the research into controlled laboratory settings to uncover the supposed underlying behavioral drivers at work in the effect 3 others responded to some saying the data for the effect was hard to discern by arguing that perhaps a broader january effect lacked evidence it could be detected in small caps or specific markets 511amid all this work and the yearly publication of evergreen articles on the effect in media outlets starved for content during the holidays leading into the new year separate groups of researchers raised a critical point they suggested that what was perceived as the january effect might have been merely statistical noise the result of overfitting and data mining to find effects that were not real market phenomena thus challenging the foundational assumptions of previous studies 12criticisms of the january effectjanuary 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 