Capricorn Effect in Jan 2017: Will Stocks Rally?

Capricorn Effect in Jan 2017: What Is It?

Capricorn astrology runs from 22nd December to 19th January. According to Wikipedia, the Capricorn effect refers to the month of January, where stock prices tend to increase more than in other months of the year. It is more widely known in finance circles as the “January Effect.” It is only a hypothesis, not a proven law of markets. The effect was first observed by Sidney B. Wachtel, an investment banker, back in 1942.

Rationale Behind the Hypothesis

A few theories try to explain why this pattern shows up:

• Tax-loss selling and reinvestment: Individual investors, who are income-tax sensitive, sell losing stocks for tax reasons at year-end and reinvest the proceeds at the start of the new year, pushing prices back up in January.
• Bonus season: The payment of Annual Wage Supplement (13th month bonus) in December, and year-end bonuses at some companies paid out in January, gives investors fresh cash to deploy into the market.

The tax-loss selling rationale does not appear to apply cleanly to the Singapore stock market, since dividends and capital gains from stocks are not taxable here the way they are in markets like the US. That said, the bonus-driven cash inflow theory could still apply locally, since many Singapore companies and the public sector pay out bonuses around this time of year.

Does the Capricorn Effect Actually Work?

Like most calendar-based market anomalies, the January Effect / Capricorn effect has weakened over time as more investors have become aware of it and tried to trade around it — a pattern common to many market anomalies once they become widely known. You can read more about the broader academic research behind it on Investopedia’s January Effect page.

Personally, I don’t make any changes to my stock portfolio based on calendar effects like this one. Seasonal patterns are interesting to read about, but they’re not a reliable basis for timing individual trades.