2023 and the January Barometer
It’s that time of year when many asset managers like to make predictions about the year ahead. Should you pay attention to them? Last years prognosticators predicted the S&P 500 would end the year above 4400, with some forecasts as high as 5300. We ended the year at 3839.50.
The market will be highly watched during January, as many traders are proponents of the view that the performance in January will predict the performance for rest of the year.
This is called the “January Barometer.” Around 1942, renowned investment banker Sidney B. Wachtel noticed that small stocks kept outperforming large stocks, with most of this unexpected performance occurring before the middle of January.
In 1972, Yale Hirsch, the creator of the Stock Trader’s Almanac, devised the January Barometer. There are two parts to the January Barometer.
The first part of the January Barometer is the S&P 500 return in the first five trading days of January and its accuracy in predicting the S&P 500 return for the year. The Stock Trader’s Almanac refers to the first five days as the “Early Warning System.”
Going back to 1950, if the S&P 500 was positive in the first 5 trading days, the rest of the year was also positive about 83% of the time.
The second part of the January Barometer is the S&P 500 return for the month of January and its accuracy in predicting the S&P 500 return for the year.
Going back to 1950, if the S&P 500 was positive for the month of January, the rest of the year was also positive 88% of the time, with an average positive return for the year of 16.6%.
If, however, the S&P 500 was negative for the month of January, the rest of the year was positive about half the time and negative the other half. In this case, the negative returns outweighed the positive returns, with an average negative return for the year of -1.75%.
Since 1950, January has been positive nearly 60% of the time. While it’s hard to pinpoint the exact cause, it is attributed to tax loss harvesting at the end of December, window dressing, investor psychology at the start of a new year, investment of cash from year-end bonuses, and predictable seasonal fluctuations that provide traders with opportunities to take advantage of entry and exit points.
The January effect is a hypothesis and does not always materialize as expected. When thinking of your retirement portfolio, it’s something interesting to watch. It could provide more guidance than your typical Wall Street prognosticator.
I believe one of the only annual market predictions worth making is this: Following a consistent, disciplined investing process will lead to your best outcomes.
A reliable process can provide a more tangible sense of security than predictions because even if you don’t know WHAT will happen in the future, you can trust that your investment process has a plan for HOW to respond.
Sticking to your investment plan year after year may not be exciting, but it usually leads to reliable, satisfactory long-term results that allow you to meet your retirement goals. And in the end, that’s the thing that matters.