Macro and Markets: Is the “January Barometer” Real?

The last day of January ended on a sour note, but stock indexes wrapped up solid gains during the first month of the year. According to the Wall Street belief, “as goes January, so goes the year,” but can investors really count on the so-called “January Barometer” for continued growth throughout 2024?

The January Barometer Flashes Optimism

One of the many Wall Street theories is that the course of the year in stock markets is predicted by the first month’s performance.  As with many other trader beliefs, this one also has much truth to it, leading to the creation of an unofficial metric called “the January Barometer.”

The hypothesis behind this seasonal indicator is based on statistics: according to FactSet, since 1950, a positive January outcome was followed by an annual gain 85% of the time, with a 12% average increase for the year. On the flip side, stocks rose by an average of 2% in the years with a first month in the red and enjoyed annual gains in just 60% of these years.

Moreover, statistically, when the previous year ended up over 15% – as was the case in 2023, with the S&P 500 (SPX) surging by 24% – a winning January led to strong annual gains in 12 out of 13 instances, with a sole exception registered in 2018.

Another statistic corresponding to the January Barometer (also stretching back to 1950) says that if the S&P 500 has risen by more than 10% in November through January, the following six months (February through July) will also be positive. Out of 14 such occurrences, the average six-month gain was 11%, with zero negative return outcomes.

“Lies, Damned Lies, and Statistics”

While everything detailed above is very reassuring, it must be said that the number of occurrences on which the January Barometer is built is not large enough to be based on a strong statistical foundation. Besides, as Mark Twain put it, “There are three kinds of lies: lies, damned lies, and statistics.” In other words, any weak argument can be bolstered by matching statistics.

Thus, for example, February is historically the second-worst month for stocks after September. Since 1945, stocks returned an average of minus 0.2% during the shortest month of the year. Some explanations for this occurrence due to the fact that the bulk of the previous year’s financial results are released in February. At this point, since these items are already in the distant past for the forward-looking markets, companies tend to load negative news into their last report for the year. However, most of the SPX heavyweights, whose results move the whole markets, report in January – which is statistically a great month for stocks.

Despite the overall appearance of reliability, economists say that the January Barometer is nothing more than a coincidence: since its inception, the S&P 500 index rose in roughly three-quarters of years, so it’s generally correct to expect a positive annual gain, regardless of whether January was in the black or not.  

Reassuring but Unreliable

Therein lies one of the reasons to question the reliability of the January Barometer: if a strong January has such great predictive power, why would the stocks reverse their course in the next month? Maybe it’s not statistics, but rather psychology: traders tend to feel more optimistic after the winter holidays, especially on the back of the Santa Rally (another questionable seasonal indicator beloved by Wall Street); they pile up on stocks, which then get ahead of themselves in January, leading to profit-taking in February.

The psychological hypothesis just received confirmation, as stocks tumbled on the last day of January after the Federal Reserve rebuffed a March interest-rate cut – even though it wasn’t actually expected this soon. It looks like investors weren’t disappointed as much as had their skepticism confirmed.  

Besides, even if the January Barometer holds water, its predictive strength has been waning since the 1980s. This is not your grandfather’s market, after all, as new regulations, financial instruments, and technologies have changed the market dynamics significantly, not to mention the increasingly proactive Federal Reserve. In recent decades, January’s stock performance predicted the year’s direction roughly 60% of the time, which is only just slightly better than flipping a coin.    

The Investing Takeaway

Stock investors are a sentimental bunch, as in “driven by sentiment.” It is totally understandable, then, that one of the best Januarys in decades gets a front-loaded credit for setting expectations for a positive 2024. And yes, the overall belief is that it will be a good year in the stock markets. If falling inflation, a robust labor market, and the anticipation of monetary easing sometime this year are not enough to comfort you in this melancholy February weather, another encouraging statistic is coming to the rescue. Historically, an annual gain of over 20% was followed by an average increase of 10% the next year in 80% of the cases.

Putting aside the exercises in popular statistics, the important takeaway should be that there is no reliable indicator for timing the market. If there was such an indicator, everyone would use it, and we would quickly arrive at the same point where we are now, thus rendering the indicator useless.

Despite the brightening outlook, there is still a good deal of uncertainty in the economy and the markets in 2024, with the Presidential Elections along with the Ukraine and Middle East conflicts adding to the usual stock market unpredictability.

Instead of looking for clues in backward-looking performance data, stay invested, checking the pulse of the economy often, and following news and developments with the stocks. Remember that in the short term, stocks are moved by earnings announcements, analyst ratings, sentiment swings, valuations, and news headlines reflecting economic, political, and other developments. Whereas in the medium- to long-term, stock performance mirrors the companies’ underlying fundamentals and depends almost exclusively on profit growth and return on invested capital.