{"id":17019,"date":"2024-01-30T13:31:09","date_gmt":"2024-01-30T21:31:09","guid":{"rendered":"https:\/\/canary.kcprod.info/blog\/?p=17019"},"modified":"2024-01-30T14:01:12","modified_gmt":"2024-01-30T22:01:12","slug":"january-barometer","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/january-barometer\/","title":{"rendered":"The \u201cJanuary Barometer\u201d: What You Need to Know"},"content":{"rendered":"\n

There\u2019s a saying in investing: \u201cAs January goes, so goes the year.\u201d Known as the \u201cJanuary barometer<\/a>,\u201d this adage suggests that the US stock market\u2019s performance in January can help predict positive or negative returns for the remainder of the year. Specifically, if the US stock market has positive returns in January, the theory suggests that the rest of the year should also have positive returns. But if January returns are negative, the January barometer suggests investors can expect losses during the remainder of the year.<\/p>\n\n\n\n

The idea was first shared by Yale Hirsch in the Stock Trader\u2019s Almanac<\/em> over 50 years ago, and it remains popular to this day. But should you put much stock in the power of the January barometer? And more importantly, should you modify your investing behavior based on its predictions? Read on for our take.<\/p>\n\n\n\n

What history tells us about the January barometer<\/h2>\n\n\n\n

We analyzed nearly a century of market data to understand for ourselves how likely the January barometer is to accurately predict positive or negative US stock market returns for the rest of the year. While the January barometer often refers to the S&P 500 specifically, we used total stock market data to enable us to run the analysis over a longer period of time. We used monthly and annual US stock market returns (using the full US total market return series from Ken French\u2019s website<\/a>, which includes both large- and small-cap US stocks) from January 1927 to December 2023, and compared each year\u2019s January-only returns to its returns for the remainder of the year.<\/p>\n\n\n\n

In years where both January returns and rest-of-the-year returns were either positive or negative, we consider the barometer to have been correct in its prediction. In years where January returns were positive and rest-of-the-year returns were negative, or vice versa, we consider the barometer to have been incorrect. The graph below illustrates just how often the barometer has correctly predicted positive or negative returns for the rest of the year since 1927\u2014just under 62% of the time.<\/p>\n\n\n\n

\"Pie<\/figure>\n\n\n\n

These odds may be better than a coin flip, but they are very far from a guarantee.\u00a0<\/p>\n\n\n\n

The chart below illustrates this data in a different way. Each dot on the plot below represents a year, with 2023 omitted because full-year returns were not yet available from Ken French\u2019s website at the time of publication and thus could not be plotted. Orange dots denote years where the barometer was incorrect, while green dots mark years where it was correct.\u00a0<\/p>\n\n\n\n

\"Scatter
Source: Wealthfront<\/figcaption><\/figure>\n\n\n\n

Why you should be skeptical of the January barometer<\/h2>\n\n\n\n

It\u2019s a cardinal rule of investing that past performance is never a guarantee of future results. January returns may have occasionally given investors some sense of whether US stock market returns for the rest of the year are likely to be positive or negative, but these predictions have some serious limitations. Let\u2019s look at three reasons you probably shouldn\u2019t modify your investing strategy in response to January\u2019s US stock market returns.<\/p>\n\n\n\n

The January barometer only applies to the US stock market<\/h3>\n\n\n\n

First, the January barometer theory only applies to the US stock market. If you hold a diversified<\/a> portfolio (like Wealthfront\u2019s Classic<\/a> or Socially Responsible<\/a> portfolios), then you likely own a wide range of investments in asset classes beyond just US stocks. As a result, the January barometer won\u2019t tell you much about the full-year performance of your entire portfolio because it is made up of so many other investment types.<\/p>\n\n\n\n

Investing according to the January barometer is a form of market timing<\/h3>\n\n\n\n

Second, changing your investing strategy in response to January returns is a form of market timing. And unfortunately, market timing rarely works. If you\u2019re unnerved by negative returns in January one year, you might be tempted to sell your investments and wait for a \u201cbetter time\u201d to invest. But a more productive response would be to take a long view of the situation. Even if you knew the US stock market will have negative returns this year (and to be clear, it\u2019s impossible to know that in advance), you\u2019d probably still want to keep making regular investments while US stocks were effectively \u201con sale.\u201d And should you decide to wait on the sidelines, that choice could have serious consequences for your portfolio, because returns tend to be disproportionately impacted by a small number of key days<\/a>.\u00a0<\/p>\n\n\n\n

Experts have some serious doubts about the January barometer<\/h3>\n\n\n\n

And finally, it\u2019s worth noting that experts have some serious doubts about the January barometer. Its record is far from perfect, and it has been wrong recently\u2014both in 2021 and 2018. A Wall Street Journal<\/em> article<\/a> from 2017 calls the January barometer a \u201cmarket myth\u201d and points out that further statistical analysis doesn\u2019t support the idea. US stocks have risen most years. If you predicted the US stock market would go up each year from February to December regardless of January\u2019s performance, you would have been right 75% of the time since 1927 (compared to 61.9% of the time if you used the January barometer).<\/p>\n\n\n\n

The takeaway<\/h2>\n\n\n\n

The bottom line? It\u2019s impossible to predict the future, and we don\u2019t think you should bother trying. No matter how US stocks perform in January (or any month of the year for that matter), we think it\u2019s wise for investors to focus on the long term and keep steadily adding money to their investment portfolio.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

There\u2019s a saying in investing: \u201cAs January goes, so goes the year.\u201d Known as the \u201cJanuary barometer,\u201d this adage suggests that the US stock market\u2019s performance in January can help predict positive or negative returns for the remainder of the year. Specifically, if the US stock market has positive returns in January, the theory suggests […]<\/p>\n","protected":false},"author":10000,"featured_media":17027,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1282],"tags":[],"coauthors":[2433],"class_list":["post-17019","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"acf":[],"yoast_head":"\nWhat the \u201cJanuary Barometer\u201d Means for Investors | Wealthfront<\/title>\n<meta name=\"description\" content=\"Can January returns reliably predict stock market performance for the rest of the year? 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