January Effect

[dmk112]

Some say it will happen other say it won't, what does everyone on the board think?

[mrmarket]

When I was at Wharton, I did research on the January Effect for my professor, Donald Kiem, who discovered it. I'd have to say of all the people I've met, he, more than anyone else, stoked my interest in the stock market. Here's more:

"The name was coined by Donald Kiem in the early 1980s. In a graduate research paper at the University of Chicago, Kiem reported the exceptional returns of small-cap stocks during January in the years 1963 to 1979. Moreover, he found that the bulk of the outperformance occurred in the first week of the month. Today, Kiem, who is a professor of finance at the University of Pennsylvania’s Wharton School of Finance, says "…though it [the January effect] may be slightly smaller, it is still very significant statistically."

The trend continued beyond 1979 as January provided small-cap stock investors with investment returns above those of large company stocks […] Small-cap stocks also continued to perform better in January than they did during the rest of the year.

One of the more often cited causes of the January effect is year-end tax-loss selling. In this situation, investors create losses in some holdings to offset gains in others to reduce their tax liability. Then they buy back these investments or others in January. But Professor Kiem notes that because taxes are irrelevant for tax-sheltered investors this factor may have minimal influence.

Other explanations have centered around large asset inflows from institutional investors or year-end repositioning of portfolios by professional money managers. However, if institutional investors (such as retirement plans) were the only reason, then it would be reasonable to see the prices of large-cap and mid-cap stocks rise as much as small-cap stocks in January. Market history doesn’t support this theory."

[dmk112]

Wow your professor discovered the January effect?? Awesome! Thanks!