The 2024 tax season will begin on January 29th, and the Internal Revenue Service, along with tax planners and filers, are preparing for it. Taxpayers have until April 15th to complete their paperwork and pay any taxes owed. Apart from prompting people to organize their financial documents, the tax season also has an impact on the stock markets.
As tax season begins, it is common to observe a drop in stock prices towards throughout the period. Although the dip is usually short-lived, with the markets recovering by mid-April, the theory behind it is relatively straightforward.
Another phenomenon observed is the “January Effect,” where stock prices decrease in December and recover in January. However, this effect has largely disappeared over time, with some doubting its existence. Again, this phenomenon is partially linked to taxes.
Read more from AS USA:
What explains the dip?
Investors are likely withdrawing money to pay for their taxes, according to data research group Kensho. They analyzed various financial sectors since 2000 and found that during the first two weeks of April when the first people start paying their taxes, the S&P 500 typically decreases by an average of 0.2%. However, just two weeks later, it increased by an average of 1.7%. The sectors that experienced the biggest positive swing during this time are technology (3% swing), industrials (2.2% swing), and financials (1.7% swing). The common denominator for these fluctuations is the repayment of taxes.
