January Effect

The resumption of stock buying in January following the squaring off of positions and portfolio rebalancing/window-dressing in December ahead of the holiday season in much of the world and year-end account closing will typically lead to a rise in equity prices in January. This is the January Effect. The January Effect is also attributed to US mutual funds selling loss-making stocks in December to offset gains to reduce their tax burdens, before resuming buying in January. The phenomenon is more pronounced in mid-cap stocks with lower liquidity. In truth, the January Effect has been observed for decades but the reasons behind it have not been satisfactorily explained.