January does not deserve the special status that Wall Street gives it. In fact, January in most respects is statistically indistinguishable from the other 11 months of the year. Keep this in mind in coming days as you read the myriad variations of the â€œJanuary is specialâ€ stock-investing theme.
January does carry special psychological significance, especially with 2020 being relegated to the history books. But psychological significance is different than statistical significance. Hereâ€™s what I found upon analyzing the several ways in which January is thought to be unusual:
1. January is a particularly good month for the stock market: While at first blush this notion appears to have some validity, thereâ€™s less here than meets the eye. The S&P 500â€™s Â average price-only return in all Januarys since the index was created in 1954 has been 1.05%, in contrast to 0.67% on average over the other 11 months. Nevertheless, given the wide variability in the monthly results, this difference is not significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine. Four other months have higher average returns than January: March; April; November and December.
2. January foretells the marketâ€™s direction for the year: This belief is called the â€œJanuary Barometerâ€ or â€œJanuary Predictor.â€ Once again, while this appears to have some historical support, in fact thereâ€™s nothing particularly special about January. As you can see from the chart below, while January has a two-out-of-three success rate in correctly foretelling the marketâ€™s direction over the subsequent 11 months, three other months â€” April, June, and November â€” have just as good or better records.
3. The first five trading days of January predict the marketâ€™s direction for the year: This indicator has a slightly lower success rate (64.1%) than the January Barometer (66.7%). As before, January is not unique in this regard: The first five trading days of July have just as good a track record as January in foretelling the marketâ€™s direction.
All of these indicators fall short of the simple prediction that the stock market will rise every year. Consider your success rate if, every Jan. 31, you predicted that the stock market would be higher on Dec. 31, regardless of how it had done in January. Your success rate, as judged by the S&P 500 since 1954, would be 75.8%. Those odds are hard to beat. But if you want to try, you will need to focus on indicators with more substance than ones based on how the stock market performs in January.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org