Does the stock market in January have a special ability to forecast the future?
What is the “January Barometer” anyway?
maybe you’ve heard the saying: “As goes January, so goes the year.”
The “January Barometer” is a popular urban myth on Wall Street or a hypothesis that claims that S&P 500 performance in January predicts its performance for the rest of the year.
It was first mentioned in 1972 by market guru Yale Hirsch.
as showed on CNBC stats:
The January barometer has been right in 62 of the last 85 years, or 73 percent of the time. Since 1929, the index followed January’s direction 80 percent of the time when it finished positive, and 60 percent of the time, when it finished negative.
More recently, in the past 35 years, the S&P 500 followed January’s direction 25 times, or 71 percent of the time (83 percent of the time for the Dow, and 74 percent of the time for the Nasdaq).
according to the WSJ stats
The January Barometer has been right only 64% of the time since 1972.
But on the other hand, you can check the last 2016 January, it was one of the worst Januarys for the stock market in U.S. history, with the S&P 500 index sliding more than 5%.
do you remember how it ended?
A 15% rally from early February through the end of the year.
The results on the January barometer are Inconclusive.
As you can see in the academic research, Stivers, Sun and Sun (2009) research examined data in 22 countries over 100 years.
The conclusions were that the January barometer was more pronounced in the last century and is less noticeable in the recent years.In another research, Marshall and Visaltanachoti (2010) argued that the January return data could not help to make a significant excess profit.
In another research, Marshall and Visaltanachoti (2010) argued that the January return data could not help to make a significant excess profit.
A possible reason for the January barometer is Momentum, a positive performance during January may actually start a bullish momentum that can help fuel continued positive performance, at least through the early months, as investors jump on the trend.
If you as an investor believes in the ability of the January Barometer to predict the market’s performance, you will only invest in the market in the years when the barometer predicts the market will rise, and you stay out of the market when it forecasts a market pullback.
On of the best advice for most individual investors, therefore, is to buy and hold a diversified group of quality stocks—without regard to whether the stock market is up or down this month.