Stock market adages put to the test – (for the next round of mulled wine)

«As goes January, so goes the year.»

 

Christmastime is also a time for forecasting the future. Shortly before the new year on the stock market gets under way, financial market analysts’ predictions are once again in hot demand. One stock market adage ascribes tremendous predictive power to the month of January. But is there really something to the maxim of January acting as a barometer?

Some stock market adages contain at least a kernel of truth, others are evergreens full of wisdom, and still others appear to have an effective half-life. The maxim that January is a barometer that foretells how the rest of the investment year will develop belongs to the third category.

 

 

Better than a coin flip…
…but with diminishing predictive quality

The maxim of January acting as a barometer put to the test

Sources: Bloomberg, Kaiser Partner Privatbank

 

The idea was first popularized in 1972 by Yale Hirsh in the Stock Trader’s Almanac. There are a number of different theories that claim to explain January’s purported predictive ability, but none of them are really convincing. The explanation that momentum at the start of the year carries over into subsequent months has little basis in any case because it takes longer periods of six or twelve months to verify a genuine “momentum effect” on the equity market. The notion that market participants position themselves in January for the remainder of the year and that more buying (or selling) demand arises in the event of a bullish (or bearish) outlook also isn’t really convincing because this would imply that the majority of investors possess a well-functioning crystal ball. This stock market adage did in fact work amazingly well during the 1950s, 1960s and 1970s. Between 1950 and 1980, the month of January pointed out the right direction in 26 out of 31 years for an accuracy rate of almost 84%! Over the last 40 years, however, the barometer’s dependability has deteriorated. The share of accurate “forecasts” since 1981 stands at just 65%.

 

A down January…
…used to presage a poorer performance going forward

Performance of the S&P 500 during the months from February through December (1950-2020)

Sources: Bloomberg, Kaiser Partner Privatbank

 

Digging a bit deeper into the statistics, the diminishing (added) value of this stock market maxim becomes even more evident. Prior to the turn of the millennium, the month of January provided a good indication of both the direction of the market and the earnings potential over the remainder of the year. It thus provided an idea on how aggressively or conservatively to position oneself from February through December. A look at the statistics since 1950 shows that performance for the year after a down January was significantly worse – by around 10 percentage points (!) on average – than performance for the year after an up January. By this logic, though, over the last 20 years an investor would consistently have been on the move too cautiously because ever since the year 2000, a down January has been followed by a positive remainder of the year in three-quarters of all cases and, what’s more, with a performance of +7.5% on average (and above +15% on median), the return for the remainder of the year in those instances has actually even exceeded that of a random year.

 

Pretty imprecise lately
Has the stock market adage outlived its usefulness?

The “January barometer” since the turn of the millennium

Sources: Bloomberg, Kaiser Partner Privatbank

 

Investment News

 

In a time of global change, you have to be very well informed if you want to be on the right side. Our investment experts provide you with regular updates about significant events and trends.

Subscribe to our monthly newsletter which includes a digital version of our Monthly Market Monitor.

!Please fill out this field
!Please fill out this field
!Please fill out this field
!Please fill out this field
!Please fill out this field
!Please fill out this field
!Please fill out this field
We will only use your email for delivering the newsletter in respect of "Investment News". Newsletter delivery is dependent on current interest.