The S&P 500 (SPX) has climbed nearly 1% during the first few days of January, driven by a rally in tech, financial, and energy stocks. The returns are right in line with the “January Effect.”
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The January Effect is a seasonality pattern that typically sees the stock market post gains during the month. Since 1928, January has historically been the fourth-strongest month of the year, finishing in the green 62% of the time with an average return of 1.2%, according to Bank of America.
Why Do Stocks Tend to Rise in January?
There are several reasons to support positive returns in January. For starters, many employees receive bonuses during December and use the money to buy stocks in the new year. In addition, the fourth quarter is marked by investors selling losing positions to offset taxable income in a strategy known as tax-loss harvesting. Many investors then use the proceeds to buy back stocks at the beginning of the new year.
Citadel Securities Head of Equity and Equity Derivatives Strategy Scott Rubner notes that other factors supporting the January Effect include money-market balances at a record $7.6 trillion and elevated participation among retail investors.
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