At last a researcher has come up with an answer to this question that allows economists to cling to their view that stock market behaviour, as revealed by share prices, is always totally rational. It is that traders are reacting to underlying information that itself has a pronounced seasonal pattern.
In a paper in the recent edition of the Economic Journal, Richard Priestley from the Norwegian School of Management confirms that the prices of UK shares usually rise in December, January and April, and by more than would be expected given the movements in the kind of economic statistics such as output, prices and the money supply that normally move the stock market. The US stock market, too, has a tendency to rise in January.
This was certainly true for the FTSE 100 index this December. It has climbed 304 points, or 6 per cent, in the latest month. The Dow Jones Industrials index in the US had a weaker month, advancing by just over 1 per cent.
Figures for the rest of 1997 also broadly confirm with the pattern. January saw a 4.8 per cent rise, although this was outweighed by an 8.9 per cent surge in September on the back of increasing optimism Britain would enter the European single currency sooner rather than later, and a 6.6 per cent uplift in July. April saw a 2.9 per cent rise.
But author Richard Priestley finds that the seasonality in share price returns is caused by the increased uncertainty about these statistics in the three months in question.
In December and January the extra uncertainty concerns the pattern of demand and production in the economy over Christmas and the new year sales period. Sales at this time can set the tone for the whole year and have unusually important implications for the level of business activity.
He writes: "Announcements of the level of economic activity ... around this period provide important information regarding the performance of the economy and subsequent levels of activity in the coming year. This has general implications for the health of the economy and specifically for firms' cash flows."
Mr Priestley speculates that in April, unexpected tax changes could be the cause of the extra uncertainty.
Whatever the reason, the economics profession's "efficient markets hypothesis" appears safe. The higher the risk, the higher the return, just as the theory would predict.