The idea that stock prices gain in January — the “January Effect” — is a fact, says Stephen Ciccone, a finance professor at the University of New Hampshire.
And the excitement investors feel about the new year is what produces that effect, he writes in The New York Times.
Ciccone notes that the Standard & Poor’s 500 Index has risen 4.2 percent so far this month, and it gained 4.4 percent last January. It also gained in January 2011.
Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.
While he doesn’t provide data for other years, Ciccone writes, “Going back to the 1920s, the first month of the year has, with striking regularity, been a great time to invest.”
So what’s the cause of the January Effect? Some say its tax-loss selling. The idea is that investors sell their losing stocks in December for the tax benefit and then buy them back — or buy others instead — in January.
“But what if the January Effect has a more fundamental cause — one that ties directly to human nature?” Ciccone asks.
To test his hypothesis, Ciccone looked at a group of stocks for which analysts had sharply divergent views. He thought optimism would prevail in January, and indeed it did.
Investors see plenty of reasons for optimism now.
“What’s driving the market is an improved economic backdrop and growing hope that Congress will come to some sort of reasonable solution to the overhang,” Hank Herrmann, CEO of Waddell & Reed Financial, tells Bloomberg.
Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.
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