It tends to be a good month for stocks. And, for good or ill, it tends to predict the rest of the year.
The former – generally referred to as the “January Effect” – certainly wasn’t in evidence this year. The S&P 500 actually suffered its worst January ever. Still, since 1929 the S&P 500 has risen during the first month of the year 65% of the time. Indeed, markets rose in January during 2006 and 2007, but fell in 2008, corresponding to movements in the overall market. However, they dropped in January 2005, but recovered and continued rising or another two and a half years. Stocks also dropped in early 2003, but ended the year sharply higher.
Which brings us to the so-called “January Barometer.” Since 1950, the indicator developed by Yale Hirsch, chairman and founder of the Stock Traders’ Almanac, has been at least 80% accurate, according to its proponents. Here too, there are exceptions – consider 1978, when the index rebounded from a January drop of 6.2% to close up 1.1% at year-end.
Consider also that, from 1950 through 2008, there were 22 January declines. The market continued to fall the next 11 months in exactly half of those situations – but recovered to close the year higher in the other half (and, it’s worth noting, among those were five of the worst January’s on record: 1970, 1960, 1990, 1939, and 1978).
So, it might be fair to suggest that the Barometer is no more accurate than a coin toss in its predictions when, like this year, January proves to be a down month.
Or it might be fair to suggest that these indicators – and others (such as the Super Bowl Indicator – see A Sure Thing? ) – while “fun”, aren’t terribly predicative at all.