January Barometer

What Is the January Barometer?

The term "January Barometer" refers to the belief held by some traders that the investment performance of the S&P 500 Index in January can predict its performance for the rest of the year.

For example, proponents of this view believe that if the S&P 500 rises between Jan. 1 and Jan. 31, this will foretell a positive result for the remainder of the year. Similarly, it holds that if the market fares poorly in January, it will likely perform poorly thereafter as well.

Key Takeaways

  • The January Barometer is a market hypothesis stating that returns in January predict those for the rest of the year.
  • It is popular among some traders and was first set out in the Stock Trader's Almanac.
  • The January Barometer is predominantly a U.S. phenomenon associated with the S&P 500 Index.

Understanding the January Barometer

The idea of the January Barometer was first devised by Yale Hirsch, creator of the Stock Trader's Almanac in 1972. However, it is still used by some traders to this day.

Traders who believe in this hypothesis may use it to try and time the market. That is, they may invest in the market only in the years when the barometer predicts that the market will rise and stay out of the market when the barometer forecasts a market pullback.

Proponents of this view will cite data showing that the January Barometer has registered only 11 errors between 1950 and 2021, giving the indicator an accuracy ratio of 84.5%. However, this phenomenon may be largely illusory. After all, from 1945 to 2021, U.S. equity markets generated a positive annual return roughly 70% of the time. Therefore, the January Barometer could just be a secondary effect of the general tendency of U.S. equities to creep higher each year, rather than a special phenomenon that can be used to improve one's market timing.

Critics of the January Barometer theory will point out that similar phenomena have not been consistently found outside of the United States and therefore that it may be a temporary anomaly specific to U.S. equity markets.

U.S. Phenomenon

The January Barometer may have a self-reinforcing character. If U.S. investors react to a strong January by investing more heavily in stocks, then this itself might cause prices to rise. If true, this could explain why the correlation between January and annual market returns is more prevalent in the U.S. than in other regions where the January Barometer theory is less well known.

Real-World Example of the January Barometer

In recent years, the January Barometer has had mixed results. In 2021, the S&P 500 declined by 1.1% in January but went on to gain just under 27% on the year. The results in 2020 were more ambiguous, with the S&P 500 losing 0.16% in January only to go on to a 16% rally throughout the remainder of the year. In 2019, the S&P 500 climbed by 7.87% in January and finished the year up 28.9%.

What Is the Santa Claus Rally?

Similar to the January Barometer, the Santa Claus rally was coined in 1972 by Yale Hirsch, author of the Stock Trader's Almanac. The Santa Claus rally looks for a rally during a six-session stretch beginning with the first session after Christmas and ending early in the New Year.

What Is a Sentiment Indicator?

A sentiment indicator is designed to provide insight on how a group feels about the market or economy. Economists and investors are always on the lookout for signals of what could occur in the markets or larger economy over the months ahead. The general idea is that market performance will often move in line with public sentiment. Some analysts also believe that recent performance could be used as a gauge for how a group of investors is feeling and would therefore expect the performance to continue.

What Is Seasonality?

Seasonality refers to the predictable changes that occur over the course of a year to an economy or business. It is not uncommon for certain times of the year to result in a drastic change in sales for companies within certain sectors. For example, holiday spending is often a major driver of full-year revenue growth for companies within the retail sector.

The Bottom Line

The January Barometer has demonstrated its staying power as a concept since it was first introduced more than 50 years ago. The statistical debate about whether the indicator is truly a good predictor of the performance of the S&P 500 Index will likely continue for decades. Regardless, the start of a New Year always presents traders with a fresh opportunity to forecast what could happen over the months ahead, and it doesn't take much of a stretch to expect that indicators such as the January Barometer will continue being part of that discussion.

Article Sources
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  1. Stock Trader's Almanac. "January Barometer 2021 Official Results: January Trifecta Thwarted."

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