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 in January can be used to predict its performance for the rest of the year.
For example, proponents of this view believe that if the S&P 500 increases between January 1 and January 31, it predicts a positive outcome for the rest of the year. Likewise, he argues that if the market goes bad in January, he will probably behave badly after that.
Key points to remember
- The January Barometer is a market theory that January yields predict those of the rest of the year.
- It is popular with some traders and was first featured in the Stock Trader’s Almanac in 1967.
- The January barometer is mainly an American phenomenon associated with the S&P 500 index.
Understanding the January barometer
The idea of the January barometer was first popularized in the book “Stock Trader’s Almanac”, written by Yale Hirsch in the 1967s. However, it is still used by some traders to this day.
Traders who believe in this theory can use it to try to time the market. In other words, they can only invest in the market in the years when the barometer predicts that the market will increase and stay out of the market when it forecasts a market downturn.
Proponents of this view will cite data showing that between 1966 and 2001 there was indeed a strong correlation between the returns of the S&P 500 in January and those of the rest of the year. However, this phenomenon can be largely illusory. After all, between 1945 and 2020, the US stock markets generated a positive annual return about 75% of the time. Therefore, the January barometer could simply be a side effect of the general trend for US stocks to climb higher each year, rather than a special phenomenon that can be used to further improve market synchronization.
Critics of the January barometer theory will point out that similar phenomena have not been systematically seen outside the United States, and therefore may be a temporary anomaly specific to the US stock markets.
The January barometer can be self-reinforcing. If American investors react to a strong January by investing more in equities, this could itself lead to higher prices. If true, this could explain why the correlation between January and annual market returns is more widespread in the United States than in other regions where the January barometer theory is less well known.
Real example of the January barometer
In recent years, the January barometer has had mixed results. In 2020, the S&P 500 returned just under 6% in January, but lost just over 6% over the year. The 2020 results were also ambiguous, with the S&P 500 gaining 2% in January, continuing to grow 19% for the rest of the year.