Investors are looking at new ways to understand when is the best time to invest in the stock markets to make most returns. While the practical and ideal way to invest in any stock is to research on the company or sector and its performance in the past, we do know that markets can be highly influenced by sentiments.
Considering sentiments and customs, there are assorted theories worldwide known as the 'calendar effect' that refers to certain months or days or seasons in the year that are good or bad for investments. These include the 'Monday effect' and 'January effect' among others.
These theories do not have any strong evidence to support it, but statistical data pertaining to the past years have shown that certain asset classes outperform in January. The 'January effect' or 'year-end' effect refers to the visible rise in stock market indices during the month. Some theories suggest that it begins at the end of December and eases on the fifth day of trading in January, while another suggests that it could go as long as mid-January.
One possible reason for the rise could be the closing of tax books at the end of December in the US for individuals and corporations. Those sitting on loss-making investments will sell them December to create a tax-loss incident to show on record. Another reason could also be to raise cash for the holiday season. Regardless, there is a visible slump seen in the stock market indices in December.
The fall in stock prices during the month is a great opportunity for investors to bet money on them. The theory also suggests that this bargain hunting adds to the gains in stock markets in January.
Another purely sentimental factor drives the markets is the new year resolution to start making more investments. Some of them also start investing in the month of January, just before submitting investment proof to their employers for TDS purposes.
Various studies were conducted to observe stock market performances in the 20th century. Many of these supported the theory that the market performance was best in the month of January, but in recent years the theory is becoming less prominent.
Sensex, for example, hit its all-time high of 34,056.83 points on 30 December 2017, in line with the January effect. Though it stayed high in January 2018, its new all-time high was seen later in August 2018.