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Is the January Barometer Useful?

Investment

Earlier this week I was reading an article about the January Barometer. Did you know that there was such a thing? Well, in a nutshell the January Barometer states that as January goes, so goes the year. In other words, if the first month of the year records a gain, then the entire year will also post a positive return. Conversely, if the first month of the year records a negative return, the market will post a loss for the year. Pretty simple.

Unfortunately, January 2015 was a down month. The S&P 500 lost 3.1% in January. As a matter of fact, this was the 15th worst January performance since 1950. And it was the worst January since last January when the S&P 500 lost 3.6%! So this must mean that 2015 is going to be a losing year right? Not so fast. While there is research that supports the January Barometer, it is not infallible. Utilizing data going back to 1950 (as published by Stock Trader's Almanac), this barometer is "right" about 75% of the time and "totally wrong" just 12% of the time. By "totally wrong" I mean that the S&P 500 moves five percent or more in the opposite direction as January. In years in which January is up, the S&P 500 manages an average return of +16.8% for the year, versus -3.4% in years starting with a down January.

Since 1950, there have been 8 of those "totally wrong" years for the S&P 500. Interestingly, 3 of those 8 years have occurred within the past decade and the latest one happened just last year. In January 2009, the stock market started the year much like 2008 ended - with a loss of 8.6%. But after a March bottom, the market got back on solid footing and ended the year with a substantial gain of 23.5%. In 2010 the year started with a -3.7% return in the S&P 500, but the rest of the year was quite strong and finished with a 12.78% gain. Last year, the market stumbled out of the gate, falling more than 3% in January, only to turn around and finish the year with double-digit gains. So there have been three "totally wrong" years for the January Barometer recently, but over time the January Barometer has been right more often than it has been wrong.

Here are some of the relevant January Barometer statistics:

  • Since 1950, when the S&P 500 records a gain in January, it has recorded a gain for the full year 90% of the time (36 out of 40).
  • When January is a positive month, the S&P 500 has average annual returns of 16.8% for the full calendar year.
  • When the S&P 500 is down in the month of January, it has finished down for the full calendar year 52% of the time (13 out of 25).
  • When January is a negative month, the S&P 500 has average annual returns of -3.4% for the full calendar year.

One final point: as you can see from the above data, the January Barometer has been far better at predicting strong years than it has been predicting losing years. Of the 25 down Januaries since 1950 (not including 2015) the market has followed up with down years 52% of the time. There have been 5 double-digit rallies following a bad month of January (2014, 2010 and 2009 being the most recent examples). These historical tendencies are just that - tendencies. While they may be interesting as discussion items, it is important to remember that they can be wrong and should not serve as a primary indicator for anyone looking to tactically manage market risk. Rest assured, I do not utilize the January Barometer as a tool to manage the risk in your portfolios.