Investment professionals are already looking forward to a halo-effect of strong market performance beginning on the first trading days of 2005 and possibly extending into February, the Associated Press reports.
The unwritten market rule of upbeat trading based on lingering holiday cheer is backed by historical evidence. Investment professionals expect this so-called January Effect to lift notoriously volatile equity investments like small-cap and technology funds.
It is difficult to say whether good cheer definitely translates into good investment performance, but closer inspection of tax laws may explain the enthusiasm to purchase new mutual fund shares in the beginning of each year. Investors waiting for equity funds to make capital gains distributions in the fourth quarter are often ready to pounce in January.
Analysts who use the January Effect as a barometer of investment performance for the following 11 months say the practice is highly reliable. Financial historians note that in only five years since 1950, especially in odd-numbered years, an early surge of market performance sounded a false alarm for the remainder of the year.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.