Kavan Choksi Discusses Reasons for the January Effect

Why Does the January Effect Happen? Kavan Choksi Explains

The January Effect is when the stock market goes up in January. Kavan Choksi says that it does not always happen, but it does happen sometimes. No one knows why it happens, but there are a few explanations people have come up with.

For instance, many analysts believe it is tied to tax-loss harvesting before the end of the previous year. Here, investors may sell positions that have declined. They do this to take the capital loss in that year's taxes. Those same investors then repurchase those same stocks in January.

The income tax theory says that some people own stocks in small companies. They sell these stocks in December to get money back from the government. Then they buy stocks again in January. It makes stock prices go up, especially for small companies.

Kavan Choksi says that other analysts think that the January effect is caused by people who invest money, they get from year-end bonuses. They may also do this by contributing money to employee pensions and 401k plans at the end of the year.

The January Effect could also be caused by domestic and international investors using the new year, specifically January, as a reminder to invest in their registered accounts. For instance, Canadian investors can add limited additional funds each year to their registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).

Another explanation could be tied to psychological factors. With many people reflecting on their previous year, they resolve to start the new year differently. Kavan Choksi says that this resolution might lead them to adopt a new investment strategy. It might also cause them to get more serious about investing in January as part of their new year's resolution.

Some studies have confirmed that, on average, people get more money back during January. However, it appears that this has decreased over the years. Kavan Choksi thinks this may be because of several reasons. One reason is that people can put their money in places where they do not have to pay taxes on it, which makes selling something to get a tax loss less important.

The January Effect is a stock market trend that can still happen, but it's not always significant. It can be hard to tell when it will be beneficial and pronounced.

For insights on business, economics, finance, and the market, follow this page for business management consultant Kavan Choksi.