"As goes January, so goes the year" is a frequently repeated saying these days. Known as the January Barometer, this saying summarizes the belief that market performance in January is a good predictor for market performance in the subsequent eleven months of that year. If markets rise (or fall) in January, then the belief is that the remaining year overall will be positive (or negative).
This is not a fringe view. Just yesterday afternoon, I heard a commentator on a major network financial news channel confidently state that January has the "best predictive power" of any month of the year, and that investors ought to look forward to a higher stock market in 2024 based on this predictor.
While I certainly hope for rising markets this and any given year, my job is to create investment strategy that supports my clients long-term and most cherished goals. What does the data and historical evidence reveal about the January Barometeri?
The data shows that the positive or negative outcome of a year aligned with the January Barometer about 70-75% of the time since 1926, with a particularly strong run from about 1950 to 1980 exceeding 80%! Over this same period, a negative January correlated with positive year less than 40% of the time. This is very interesting indeed. (If you have been reading my articles for any length of time, SURPRISE! You were probably expecting me to reveal that the Barometer is illusory and not supported by the evidence, and to debunk the narrative. Not so fast, but please read on.)
People have devoted a lot of time and energy towards figuring out why this trend is so robust, and why a positive or negative January should correlate with the rest of the year. Why does this connection exist? Can it be translated into actionable investment strategy?
As I mentioned above, the January Barometer is successful about 70-75% of the time for the past century, reaching peak strength from 1950 to 1980. How has the Barometer performed in more recent years, with economic, social, and geopolitical conditions more like what we face in 2024?
Reviewing the graphic again, what we find is that a negative January preceded a positive year nine out of the past eleven times. Investors who reacted solely to January's performance as an indicator of things to come would have missed out on profitable years in half of the last two decades, crippling their long-term outcome. This underscores the first caveat of the January Barometer: "Past performance is not indicative of future results". Market returns in the short term are driven by vast amounts of data and, crucially, look forward, not back at what happened in the first four weeks of the year. Investors ought to do likewise.
The second caveat is that simultaneous occurrence does not imply causation, even if it happens many times. Take the "Super Bowl Indicator," for example, which suggests market trends based on the winning football team - up if the NFC team (San Francisco 49ers this year) wins, and down if the AFC team (Kansas City Chiefs this year) triumphs. However, the idea that a single football game could significantly influence the stock market lacks logical grounding. While this indicator has been surprisingly successful, even more so than the January Barometer since 1968, it's seen as a lighthearted superstition rather than a viable strategy. The Super Bowl indicator is not helpful for long-term investment strategy (but it might be a good enough reason to root for San Francisco this year!). The key thing here is that correlation is not causation.
Caveat three for the January Barometer is that anything can correlate with positive annual market returns because the market is positive four out of every five years on average. The strength of the probability that markets will be up in any given year easily creates the appearance of correlation. The question is why January tends to be a positive month, and this could be a combination of lagging effects from the fourth quarter, tax considerations, and holiday bonuses and spending along with the commencement of earnings season. Although it can be fun to guess, this line of thinking is not very relevant to crafting coherent investment strategy. While the
January Barometer is a strong signal, it is not a useful one for the pursuit of long-term goals.
[As a bonus, other weird things with surprisingly strong correlation to the market include:
The Men's Underwear Indicator: Hypothesized by former Federal Reserve chair Alan Greenspan, this cheeky indicator posits that in tougher economic times, people tend to delay replacing items that wear out. Since men's underwear is a practical item and not usually seen, it's often one of the first things people hold off on buying when they're feeling the financial squeeze.
The Sports Illustrated Swimsuit Issue Indicator: This quirky indicator suggests that if the model on the cover of Sports Illustrated's swimsuit issue is American, the S&P 500 will outperform its historical average for the year. Conversely, if the cover model is from outside the U.S., the S&P 500 will underperform. This indicator is more fun to track than most economic data.
The Lipstick Indicator: Proposed by Leonard Lauder, chairman of Estée Lauder, this theory suggests that during times of economic downturn, lipstick sales increase as women substitute more expensive luxury items with less costly cosmetics like lipstick. So, lipstick smiles when the economy pouts.]
While fascinating correlations like the January Barometer and even more whimsical ones like the Super Bowl Indicator or the Sports Illustrated Swimsuit Issue Indicator may capture our imagination, they should not guide our investment strategies. These trends, though intriguing, often confuse correlation with causation. The true north for investors should be grounded in sound financial principles and long-term goals, not swayed by the winds of anecdotal indicators, no matter how compelling their historical 'accuracy' may seem.
Remember, the stock market's inherent tendency to rise over the long term is a far more reliable guide than any seasonal pattern or playful predictor. In the world of investing, it's prudent analysis and strategic patience, not intriguing coincidences, that pave the way to success.
Frank Hujsa, CFP®, CLU®
Partner, Acadium Financial Partners
Financial Adviser, RJFS
C 239.207.4392
27499 Riverview Center Boulevard, Suite 108
Bonita Springs, FL 34134
Frank.hujsa@acadiumfinancial.com
www.acadiumfinancial.com
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i Source: Dimensional Fund Advisors, used with permission. In US dollars. Returns are of the S&P 500 Index. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Values
change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Even a long-term investment approach cannot guarantee a profit.