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As January goes, so goes the year

  • By Jeffrey A. Hirsch,
  • Wiley Global Finance WILEY GLOBAL FINANCE
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As the opening month of the New Year, January is host to many important events, indicators, and recurring market patterns. U.S. Presidents are inaugurated. New Congresses convene. Financial analysts release annual forecasts.

January also marks the occurrence of a large number of seasonal indicators. For example, Day Two marks the end of the “Santa Claus Rally” and the “First Five Days” offers a first glimpse of the trading environment for the coming year. The month’s overall gain or loss, though, triggers something called the January Barometer. This states that the movement of the S&P 500 during January sets the stock market’s direction for the entire year. January’s direction has correctly forecasted the major trend for the market in most of the subsequent years.

An overview of the January barometer and its performance

January’s prognostic power is attributed to the host of important events transpiring during the month. Prior to 1934, newly elected Senators and Representatives did not take office until December of the following year, 13 months after their election (except when new Presidents were inaugurated). Since 1934, however, Congress convenes in the first week of January and includes those members elected the previous November. Inauguration Day was also moved up from March 4th to January 20th. These events clearly affect the U.S. economy and Wall Street, as well as the rest of the world. Add to that January’s increased cash inflows, portfolio adjustments, and market strategizing and the prophetic power of January becomes obvious.

Devised by Yale Hirsch in 1972, the January Barometer has registered only seven major errors since 1950 for an 88.9% accuracy ratio. Including the eight flat years (less than +/- 5%) yields a .758 batting average. Figure 1 shows this in graphic form. Of the seven major errors:

  1. Vietnam affected 1966
  2. Vietnam affected1968.
  3. 1982 saw the start of a major bull market in August. 
  4. Two January rate cuts and 9/11 affected 2001.
  5. Anticipation of military action in Iraq held the market down in January 2003.
  6. The second worst bear market since 1900 ended in March of 2009.
  7. Federal Reserve intervention influenced 2010.

Excluding 2001, 2005 and 2009, full years followed January’s direction in the last fifteen post-election years. Midterm years tracked January’s direction in ten of the last fifteen years. With the dice loaded for pre-election years (the Dow has not been down since 1939), the January Barometer has a 15-1 record; the only loss in 2003 due to exogenous events ahead of the military action in Iraq. Eleven of the last fifteen election years have followed January’s course.

Down Januarys signal trouble ahead

Graphing the S&P 500’s performance since 1930 based upon whether or not January was down, it is apparent that the down January should be heeded. Figure 2 reveals the stark difference in the average performance throughout the year and by year end when the S&P 500 is down in January.

Down Januarys are harbingers of trouble ahead in the economic, political, or military arenas. 1932 saw the Great Depression rage on and was Hoover’s last year in office. By 1935, the economy was on the mend, but not quickly enough as the S&P 500 bear market did not end until March. Threats of war and eventually World War II impacted the market from 1939 to 1941. Post-WWII tensions and cleanup efforts eventually triggered a minor bear market in 1948.

Eisenhower’s heart attack in 1955 —a flat year — cast doubt on whether he could run in 1956. Two other election years with down Januarys were also flat (1984 and 1992). 1968 started down as we were mired in Vietnam, but Johnson’s “bombing halt” changed the climate. Imminent military action in Iraq held January 2003 down before the market triple-bottomed in March. After Baghdad fell pre-election and recovery forces fueled 2003 into a banner year.

2005 was flat, registering the narrowest Dow trading range on record. 2008 was the worst January on record and preceded the worst bear market since the Great Depression. A negative reading in 2010 preceded a 16% April-July correction, which was quickly reversed by QE2. In total, fourteen bear markets began and fourteen continued into second years with poor Januarys.

Though some years posted full-year and 11-month gains, every down January since 1950 was followed by a new or continuing bear market, a 10% correction, or a flat year. Down Januarys have been followed by substantial declines averaging –15.2%, providing excellent buying opportunities in most years. See Table 1.

Table 1: After a Down January, S&P Closes to Low for the Next 11 Months

JEFFREY A. HIRSCH is editor-in-chief of the StockTradersAlmanac.com and the author of The Little Book of Stock Market Cycles (Wiley, 2012). He is Chief Market Strategist of the Magnet AE Fund.

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Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Article copyright ©2012 by Jeffrey A. Hirsch. Adapted from the Stock Trader’s Almanac with permission from John Wiley & Sons, Inc. The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
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