January Effect

The January Effect is an economic phenomenon wherein stock markets experience gains in the month of January. This is because investors sell stocks to incur year-end capital gains taxes in December.

The theory was first introduced by a stockbroker in 1928, when he noticed that the Dow Jones Industrial Average tended to rise around this time in a calendar year. The theory behind this effect is that after the Christmas season, many investors are looking for places to invest their money and stocks are one of the few options available. It has been observed in most US equity markets, where it is most pronounced with small cap stocks.

As a result, they will invest in these stocks to take advantage of the lull before earnings reports come out and trading volumes pick up again in order to avoid one more tax event on their investment profits.