The “January effect” long has intrigued academic researchers and stock investors alike. While the definition of the January effect and its causes vary, the historical evidence points to a clear outperformance by stocks in January. The January effect is most often, and most prominently, seen in small-cap stocks that struggled the year before.
The reason behind the January effect is believed to be tax-loss selling. Investors sell losing stocks in December, offsetting capital gains elsewhere. They then repurchase those stocks in January, which allows them to maintain their overall portfolio, but defer taxes on profitable positions.
The academic literature suggests that the January effect should be more prominent in 2017, most notably because the Trump administration and Congress are expected to lower investment tax rates. That makes 2016 tax-loss selling strategies more profitable — since capital gains taxes paid in 2017 and beyond may be at lower rates.
With 2016 coming to a close, here are five stocks to buy to benefit from the January effect.