January effect

January effect (somtimes called "year-end effect") is an unexplained financial phenomenon of most stock markets having significantly higher returns in January than in other months of the year. This effect was observed in most countries and in various markets, including share, bond and commodity markets.
January effect

This strength of the effect varies depending on company size and other factors.

One possible explanation is tax loss selling by investors of poorly performing stocks to capture the capital gain (though this doesn't explain why the effect is observed in countries like Australia that have a different tax year). Another explanation is that the ratio of buys to sells for financial institutions drops significantly in days before the end of the year, pushing down the prices. However, even while this may be true, there is no explanation for this behavior and no explanation of why other investors do not take advantage of this.

The January effect is often preceded by a late-December rise in stock prices, known as a Santa Claus rally.



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