Does January Really Set the Tone for the Year? Yes!
Financial media has lots of sayings to describe the stock market seasonality, but one that seems to come true is, â€œAs January goes, so goes the rest of the yearâ€.
As we wrap up one of the craziest investment years since the 1970â€™s Oil Embargo, investors are looking for some time-tested guidance. Perhaps next Januaryâ€™s stock market moves can tell us something about the prospects for 2021 being a good or bad year.
What is the January Barometer?
This well know technical indicator is commonly defined as the stock marketâ€™s movement during the month of January predicts how the rest of the year will be. For decades, market forecasters have observed that when market indices decline in January, there is a significant negative bias for the remainder of the year and vice versa also holds true. It is largely based on the theory that current stock market momentum feeds momentum in the future!
As an example, if the S&P 500 Index and Dow Jones Industrial Average both close higher in January than the previous December 31st, the overall stock market is expected to have a noticeable uptrend in prices for the entire year. The opposite is believed to be equally true.
Does it work â€“ Yes!
A reliable market trend gauge should be tested over a long period of time and in different economic conditions:
Since 1970, there have been 20 times when the DJIA and the S&P 500 Index both had negative results in January. As expected, the average inter-year correction during those years was (-18%) and the year finished down a -2%. (See Table A)
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During the same time, the DJIA and S&P 500 Index both finished January with positive returns 31 times. As expected, the average inter-year advance was 20% and the year finished up 16%. (See Table B)
While these results are impressive, please keep in mind that as with all market forecasting tools, the January Barometer had spectacular failures with buy signals in 2001 & 2008 and sell signals in 1982 & 2016.
I have been a portfolio manager for nearly 30-years, and I believe in the seasonality of stock market trends. However, there is no â€œmagic wandâ€ to stock market forecasting, and veteran market forecasters use a variety of statistics in trying to â€œpeak around the cornerâ€ in search of the next bull or bear market.