The Diminishing Impact of the January Effect

The January effect, named for the market anomaly where stock returns in January are typically higher than in other months, has been a subject of interest since it was first documented in 1942.

Traditionally, this effect has been attributed to tax-loss harvesting at the end of the year, where investors dump their laggards to offset capital gains tax liabilities, leading to a December selloff. This is followed by a buying spree in January, as investors repurchase stocks, boosting demand and prices.

Other explanations for the January effect include the influx of cash from year-end bonuses into the stock market, the rise of tax-sheltered retirement accounts (IRAs, 401(k)s, etc.) and the prevalence of new investment instruments and regulatory changes.

Then there’s also a perceived increase in investment activity as people follow through on New Year’s resolutions to invest more. January, after all, has long been associated with fresh starts and positive animal spirits. A recent YouGov poll found that about a third of American adults made New Year’s resolutions for 2024.