15 December 2008

The January Effect

For Share Investors, it is not Christmas that is the most wonderful time of the year but January. January in Investors' circles is known traditionally as the month in which share prices rise quite sharply. It will therefore be quite interesting to see what will happen this time!

Traditionally, it has been estimated that January and April are months where Shares actually do well. It is said that in the other months the average gap between equity returned and cash returns is zero.

Most stock market commentators are unclear why the January effect should exist. The reasons often quote are to do with Riskiness of Shares- Higher returns should be a reward for taking on extra risk. If Shares are riskier in January, then they should generate higher returns. This seasonality is caused by higher risk at particular times of the year.
At the turn of the year, sales, output and the money supply are all larger than other times. Economic data is more important in December and January than other times. Investors therefore face a greater risk of bad news e.g Christmas trading is poor etc.

To summarise, therefore to compensate for the higher risk, expected returns must be higher.
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