Share Price Effects

The stock market likes to speak its own language and the January Effect is another descriptive term market analyst use to explain January price fluctuations. They don’t always happen but they happen enough to have become noticeable. Investors, in the last half of December, have found an ingenious way of lowering their next year’s taxes:

They sell a portion of their stock and then claim the loss as a tax deduction. Then, and here comes the tricky and the less than honest approach to taxation, they quickly, possibly in the first few days of January, buy back their stock. This buying spree cause a rise in stock prices and those who’ve perpetuated this scheme seldom gains because buying back is more costly. It’s assumed by market analyst they’ve actually been wasting their time and effort.

History of the January Effect

The first increase in stock buying was first observed in 1942 by Sydney B. Wachtel. Up to then each January saw a rise in stock buying but no one seemed to know why. Most probably passed it off as something investors did to ward off winter doldrums or they had some other easy explanation. The buying spree involved lower priced stocks and this in itself soon began giving hints that human shenanigans were behind the slight rise in the uphill climb of the market. Possibly, this is true. Nothing about the volatile stock market is written in stone.

Other explanations for the bump-up

Year-end bonuses also put money in the hands of buyers and many of those choose to buy stocks with this added cash is another explanation for this latter half of January rise in market activity. And since investors and analysts don’t like to leave any rocks unturned when going after reasons for this or that market change, there are probably many other creditable and incredible assertions concerning this effect.

As Wachtel saw and reported, however, some years this effect is barely noticeable, if at all. The years, 1982, 1987, and 1989 and 1990 showed no uphill January buying.  In a journal article in 1942 ”Certain Observations on seasoned movements in Stock Prices” he made his assertions about the change in buying habits of some investors and he also coined the phrase January Effect. The word got noticed and it has since become a part of the investment-game play on words.

Interested and knowledgeable investment analysts aren’t likely to take any market aberrations without at first attempting to find their causes. Several articles on the subject of seasonal market fluctuations, especially those that cause the market to rise, are available as proof of their concern.

1. Permanent and Temporary Components of Stock Prices, by Eugene F Fama, Kenneth R French

2. Certain observations on seasonal movements in stock prices by S. B. Wachtel

3. The Clustering of Extreme Movements: Stock Prices and the Weather by BG Malkiel, A Saha, A Grecu

4. Economic Implications of Extraordinary Movements in Stock Prices by Benjamin M Friedman, David I Laibson, Hyman P Minsky

The January Effect is probably only one stock market variance that cause analyst to search for clues as to reasons why. And that’s understandable. Where money and investing are concerned it often pays to be aware of probably will happen in the market if all the market aberrations add up to problems or stumbling blocks when creating healthier economies.