Is the January stock market effect real? | Hargreaves Lansdown (2024)

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Does the January effect still exist? ›

The effect was most pronounced among small-company stocks from 1940 to the mid-1970s. But it seemed to shrink through around 2000 and hasn't been as reliable since. Today, many investors are skeptical of a January effect occurring in 2024 because of a run-up in stocks in the last two months of 2023.

Summary. The January Effect is a tendency for increases in stock prices during the beginning of the year, particularly in the month of January. The cause behind the January Effect is attributed to tax-loss harvesting, consumer sentiment, year-end bonuses, raising year-end report performances, and more.

Granted, the average returns for the S&P 500 during June and September have been lower than those in January. Still, it's indisputable that January has been one of the worst months for the S&P 500 over the last 20 years.

If the share price falls, short sellers pocket the difference when they return the shares to their original owner. The increased shorts against Hargreaves Lansdown suggest that investors believe shares in the wealth manager will further decline.

According to Reuters, since 1945, April and December are tied as the best-performing months of the year for stocks, with an average return of 1.6%. (September is notoriously the worst, with an average loss of -0.6%.) During recessions, April's positive performances can be even more pronounced.

The stock market could see supercharged gains in 2024 if the "January Trifecta" materializes. The indicator tracks the performance of the Santa Claus rally, the first five trading days of January, and the month of January.

Proponents of this view will cite data showing that the January Barometer has registered only 11 errors between 1950 and 2021, giving the indicator an accuracy ratio of 84.5%. 1 However, this phenomenon may be largely illusory.

The January effect is the name given to the belief in a seasonal increase in stock prices in the first month of each year. People have generally attributed a supposed rally each January to the rise in buying that follows the price drop that typically happens each December.

According to this hypothesis, investors sell off underperforming stocks in December to lock in a capital loss for the year, thereby reducing their tax bill, which causes a temporary dip in prices. In January, prices recover when buying picks up again.

Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.

What are the two worst months for stocks? ›

The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year.

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The January effect is a hypothesis that there is a seasonal anomaly in the financial market where securities' prices increase in the month of January more than in any other month.

The January effect is the supposed seasonal tendency for stocks to rise in the first month of the year. The January effect is said to occur when investors sell losing stocks in December for tax-loss harvesting and repurchase them after the New Year.

The January Effect is a calendar anomaly sometimes observed in the market where stock prices, especially those of small-cap companies, tend to increase slightly more (on average) during the month of January than in any other month of the year.

With tax-loss selling, the idea is that U.S. investors sell a lot of losing stocks in December to generate losses they can use to reduce their taxable income, and therefore lower their tax bills. That generates abnormal downward pressure on the market in December, subsiding in January, giving stocks a bit of a bounce.