Common Stock Market Movements in December and January

The end of the year is a time when stocks usually tend to fluctuate more than other months. As a long-term investor, I am not fussed about the short-term price choppiness of the stock market, but being familiar with any price momentum can sometimes be used to find bargains in the market.

With that, here are two common price movements that may occur in December and January.

Santa Claus rally or January effect

The Santa Claus rally is a rise in the price of stocks in the last two weeks of December through to January.

Santa Claus may be a fictional character, but the Santa Claus rally is very much a real phenomenon that can bring cheer to investors. As we all know, market prices are affected by the seasonal changes in demand of stocks. An uptick in demand during this period is the catalyst to this price movement that we may encounter.

There are many suggestions (albeit with little proof) of what causes the inflow of funds into stocks in December. One explanation that has gained traction is that many people receive their bonus at the end of the year and consequently decide to invest their excess funds into stocks.

Another reason may be that fund managers are adding to their holdings with stocks that have performed well before the end of year review. Some have also suggested that investors may start an investment program at the beginning of the year, leading to an increase in share prices.

Whatever the cause is, the Santa Claus rally can have a very real effect on the stock market.

Tax-loss selling before 15 December

Stock prices might decline prior to tax filing day as people tend to sell their loss-making positions in a bid to offset their taxable income. This outflow of funds away from stocks during this period can depress stock prices.

This phenomenon is usually only seen in countries that have tax laws that allow investors to add any realised investment losses to their income statement and offset some of their tax payments.

As with any short-term price movements that are not a result of the fundamental change in a business, the depressed prices sometimes mean bargains for long-term investors.

The Foolish bottom line

The calendar effect of stocks is seasonal changes in stock prices that occur during specific periods of the year. December and January, in particular, may have the most pronounced effect on stock prices during the year. As long-term investors, we should not be trying to time the market. However, being aware of these phenomena can sometimes be useful in finding bargains during the holiday season.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.