January Effect: January Effect

Definition:

The January Effect is a common statistical analysis of stock market movements in which returns in January tend to be "positive". The January effect first appeared in the United States, and then scholars in other countries have also found that the January effect exists in other stock markets.

Part of the reason:

Tax effect

Here's what the tax code looks like in the United States; If profits are taxed, the tax is called capital gains tax. If the stock is sold at a higher price than the purchase price, the profit is taxed. But the tax is symmetrical. If the selling price is lower than the purchase price, the investment loses money. In principle, these losses are tax deductible.

The profit of stock investment erodes duty effect, not be of plan account face, however the business according to substantial. If holding stock is a paper loss, in principle, no tax deduction. You need to sell your shares on the market to turn a paper loss into a real loss to get the tax relief.

In the U.S., the deadline for filing tax returns is at the end of December, so to qualify for the tax deduction, you have to sell the paper loss shares before the end of the year. In order to lower their tax bill, many investors sell shares with paper losses ahead of December, leading to a weak market in December. But in January, it all starts again, and investors return to the market, putting their December cash back into the stock market and buying their favorite shares, which in turn drives the market higher. And the effect of the tax factor driving the stock up is called.

Whitewash the kitchen window

The annual report of the fund is usually made in December and sent to the fund holders at the beginning of the year. In the annual report of the fund, there will be a list of the top ten holdings to tell the fund holders what the shares are held by the fund and let the fund customers know the investment strategy of the fund. Since the disclosure of the relevant shareholding, the holding of shares should be as visible as possible, such as some healthy blue chip shares will meet the requirements. But the problem is the reward of blue-chip stocks lower, because the risk is also low, may be less attracted to fund performance, so compromise is at the beginning of this year, to buy some listed companies, two, three line through them to improve fund returns, then before the year end, selling the shares, in the blue chip stock, make to the fund list more good-looking.

As a result, at the end of each year, some stocks with less than 1 share prices fell, while the big blue stocks supported them. In January of the following year, the fund has completed its annual report and has to strive for performance again in the New Year. As a result, the fund repurchases shares and drives up the stock market, forming the January effect.

Year-end bonus effect

Traditional western bonus date, more at the end of December, early January. People put the bonus or double grain into the stock market more time in January, thus driving the stock market in January effect.

Seasonal reasons

There are many important holidays in December. In the United States, there are Thanksgiving, Christmas and New Year's holidays, and fund managers tend to take their holidays in December. When they return from the January holiday and return to work, they tend to redeploy their investments and buy shares, driving the January rally.

Lunar year or driving effect

These are different reasons for the January effect. Of course, for Hong Kong stocks, all assumptions may not be completely valid, for example, the failure of investment in stocks is not tax deductible, so there is no tax effect in Hong Kong. And year-end bonus issuance, Hong Kong, Chinese capital around the Lunar New Year, that is, around February, so Hong Kong stocks January effect may therefore be affected.

The often misread January effect:

The January effect, while perhaps the most famous of all seasonal stock market patterns, is still often misinterpreted. For example, many investors think the January effect refers to the unusual strength of the stock market as a whole in the first month of the year, but that's not the case. Studies of the phenomenon suggest that unusual seasonal patterns emerge at this time of year only: small-cap stocks tend to outperform large-cap stocks.

So the January effect doesn't refer to the broad market. It actually refers to the relative strength of small stocks. Also, for small-caps, the relative strength actually began in mid-December and essentially ended by mid-January.