Will there be a stock January Effect this year?

You hope the New Year will bring you things, but you never know if you'll get anything nice or nothing at all... unless you’re one who waits for what the stock investing community refers to as the “January Effect.”

But wait, is the stock January Effect real? And is it happening this year?

Let’s understand this concept better.

What the January Effect is

The January Effect is simply the term stock investors use to refer to the tendency of stock prices to rise in the first month of the calendar year. In the last ten decades, we’ve seen some concrete numbers that support this theory.

The US stock market has risen in January 85 times in the last 130 years. For several other markets, the percentages are significantly greater. In the UK, 71 per cent of the time, 74 per cent in Japan, and 78 per cent in Australia.

Then again, the stock market’s general trend is upward over time. Hence, the stock January Effect is warranted. And there are several reasons for stock prices and other assets rising in the first month of the year (which we’ll explain to you below). Still, don't think that every year will be the same.

Why stocks rise in January

You might have a hunch on the reasons that prompt a stock January Effect to happen. Generally, there are three theories as to why stocks rise in January.

Taking advantage of tax losses

Investors in countries such as the United States and France tend to get rid of underperforming stocks before the end of the year to take advantage of tax-loss harvesting or just to rebalance their portfolios.

France, for instance, requires its citizens to pay tax on investment gains resulting in many people selling stocks at a loss to offset capital gains tax payments (or what is known as tax-loss harvesting).

Increased buying power

Most of us get year-end bonuses. Typically, you have 3 options with that additional money: spend it, save it, or invest it. Investors most likely will focus on the third choice. And you know what happens next when market factors come into play and affect the share prices.

See also: 6 Financial Tips for a Prosperous 2022

Consumer sentiments

The new year represents a fresh start and provides excitement to the markets. Many of us begin investing or opening new positions in the new year simply because we believe it is a good time to do so. We buy stocks because we expect prices to climb, and when demand rises, prices rise as well.

There could be other possibilities that bring about the stock January Effect. There seems to be no universal pattern on its primary cause. To illustrate, some studies found that the January Effect is stronger in smaller companies in the US, but is less related to size on an international scale.

This year, whether we like it or not, the pandemic will impact the stock January Effect… but up to what extent?

How strong is the stock January Effect this year

The economy suggests that this year will be different – mainly because of the events in the past couple of years, in particular, COVID-19.

All major stock market indexes fell significantly in March 2020 when the pandemic started. However, the amount of the decrease at the time, as well as the pattern of the following recovery, differed slightly.

For example, major European markets and conventional stocks in the United States have lost about 40% of their value between 5 January 2020 and 15 March 2020. The post-coronavirus recovery, however, shows that the NASDAQ stock market index value was roughly 65 per cent higher on 14 November 2021 than it was in January 2020.

As the market continues to recover, investors around the world are more optimistic of the likelihood for a strong market performance this January as well.

How to prepare for the January Effect

As we start a new year, it may be worthwhile to keep a careful eye on the markets. Remember to keep yourself up-to-date with news that may help you assess the markets throughout the first month of the year.

And while you may belong in the group of people who want to get in early on a well-documented market trend, may you not overlook what has occurred previously, since it may provide insight into how the year will unfold.

Nonetheless, here are a few ways you can do to prepare for the January Effect.

Avoid predicting the markets

Timing the market to profit from periodical changes has never been a good idea. In the short run, you may end up with a winning set of stocks, but you may also change your entire asset allocation and waste a lot of time and energy doing so.

As we have learnt from the world’s most successful investors, time in the market is always more important than timing the market.

Look into a company’s fundamentals

The January Effect might have a minor impact on your overall investment portfolio. Ergo, going back to the basics, i.e., looking into a company’s fundamentals, is the ideal long-term strategy. After all, we decide to invest after evaluating a company's financial health, including revenues, growth potential, and profit margins, as well as other factors like management, business model, and economic moat.

This will help you better understand price swings and fluctuations, thereby, giving you more confidence in stock choices that have a higher chance of making you more money.

Maintain a diversified portfolio

Diversifying your portfolio is an essential part of investing. If you own shares of different companies in different sectors, you can minimise the risk of losing all your money if one company goes bankrupt.

This is because there are always other companies to invest in and help make up for the loss. Diversification also helps reduce the volatility of your investments, which means you don't have to worry as much about fluctuations.

Avoid high-risk investments

High-risk investments such as investing in start-ups or investments with no fundamentals can be risky and may result in a loss. These investments are unregulated, and the value can change unpredictably.

See also: Low-Risk Investments in Singapore

We all know that no one can anticipate how the markets will perform in the future with any level of certainty. All we can do is focus on the parts that we have control over, which is your portfolio diversification and expenses when it comes to investing.

Do remember that past success is no guarantee of future outcomes. As the stock January Effect could be inconsistent, we should always think and do a thorough assessment before we invest in anything, be it in stocks, bonds, or cryptocurrencies.

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