What Is the January Effect?

The January effect is a phenomenon that occurs in the stock market during the month of January. As a result of the January effect, the stock market gets a boost by all of the buying of stocks that is occurring by many of the investors.


For tax purposes, many people sell their stocks during the month of December. Then, at the beginning of the new year, they take that money and use it to purchase new stocks. As a result of this, the stock market gets a boost and increases in value.


Although this used to be more prominent, the January effect is not nearly as pronounced as it once was. Part of the reasoning behind this is that more people are using tax advantaged retirement accounts. With these types of accounts, you do not need to sell your stock at the end of the year because you do not have to pay taxes on the gains in your portfolio. You can simply keep the stock in your retirement account until you reach the age of 59 1/2. At that time you can start taking distributions from your account and paying taxes on them.