Will The Stock Market’s ‘January Effect’ Make You Money In 2022? – Forbes
TOPSHOT – Certain stocks have historically outperformed in early January, might we see the same … [+]
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Historically, researchers have found that January has historically been a strong month for stocks, especially smaller companies with weaker performance the year before. Might we see this same trend in 2022?
The Research
Multiple researchers have examined the January effect. This paper by Mark Haug and Mark Hirshey of the University of Kansas explains the January effect and finds it to be present over many decades up to 2005 when the research was published.
Specifically, smaller companies that have had weaker performance over the prior year can rebound quite strongly over the first few trading days of January if history is any guide.
What Causes The January Effect?
Researchers believe there may be two primary causes of the January effect. This is helpful because historic trends may just be data mining, hence having an underlying rationale can add weight to the theory.
Tax-Loss Harvesting
Firstly, tax-loss harvesting may drive the January effect. If investors are selling losing investments to maximize taxable losses in December, then they perhaps may want to buy them back in January of the next calendar year, after a 30 day window, to avoid a wash sale for U.S. investors in taxable accounts. That might depress the share prices of poor recent performers in December, only for them to bounce back in January. That seems consistent with what we see in the data.
Window Dressing
Secondly, there may be window dressing from professional portfolio managers. Often such managers report their holdings to clients at the end of December. It’s a much better story to tell if you can showcase your winners from the prior year and dump the poor performers. However, after the reporting snapshot is done, maybe managers return to owning their poor performers, hoping they will do well in the new year.
Reasons For Caution
Any investment strategy as simple as buying certain stocks in a given month should be put to the test. With 12 months to test, there’s a chance that one month of the year looking good could just be random. …….