A widely followed market theory, popularized by the Stock Trader's Almanac, claims that as January goes, so goes the full year. After 2022 saw US stocks have their fourth worst year since 1945, the momentum appears to have shifted thus far this year, with the S&P 500 gaining 5% in January 2023. Because of the good start to the year, followers of the January barometer believe stocks may have bullish momentum in 2023. And while there are reasons to take this indicator with a grain of salt (along with other calendar-based trading patterns), this one has held true several years in a row.
Stocks stop the bleeding
By the end of 2022, US and global stocks both lost more than 20%. But investors were able to turn back the bears this January (see Stocks gain 5% in January chart).
Stocks gain 5% in January
So, does this year's positive January point to an up year for US stocks? Probably, at least based on history.
Momentum is one of the primary reasons why some investors give credence to calendar-based chart trends like the January barometer. The thought process here is that a bullish (or bearish) start will set the market in that direction for the rest of the year.
A bullish start is the stronger predictor
Based solely on the past performance of the US market, an up January has generally been bullish for stocks. That has been particularly the case when the market has gained more than 5% in January.
Moreover, the January barometer has held true roughly 75% of the time since 1945 when January experienced market gains. Notable exceptions followed extended periods of market growth. Conversely, a down January has not been a reliable predictor of an overall weak year.
Why might up Januarys be better predictors than down ones? One reason may be the historical proclivity of stocks to rise. US stocks have finished higher in all but 18 out of 77 years since 1945. So, the fact that stocks finish higher for the year so often after both a positive and negative January may simply be the result of this directional bias.
Indeed, there is a strong correlation between positive January S&P 500 performance and positive market performance for the entire year. During only 2 years since 1945 have stocks dropped sharply (a price decline of more than 10% for the full calendar year) after a positive January, with both instances occurring at the end of powerful multiyear market advances (1966 and 2001).
As previously noted, a down January may not be a reliable predictor of a weak year overall. Going back to 1950, the stock market actually ended higher in 14 out of 29 years when January finished in the red, and often by a very substantial amount. That was the case in both 2020 and 2021.
First 5 days
In addition to the January barometer, some investors who like calendar trends place particular emphasis on the first 5 trading days of January as an indicator of where the market is headed for the full year.
Stocks gained 1% during the first 5 trading days this year, providing more evidence of a positive outlook for this year—according to those that follow calendar trends. The first 5 trading days of 2022 saw stocks lose 2%, en route to a 20% full year loss.
A major problem with this theory is that the sample size of trading days is small (5), compared with the January barometer (typically about 20—which is also not a large sample size), to be a reliable predictor of momentum for the rest of the year. Given the small number of trading days associated with the first 5 days theory, there does not seem to be enough time for momentum to become a significant factor.
Many investors like following the January barometer because it provides an easily identified outcome. While it is impossible to predict the future, proponents of the January barometer think this indicator may provide some indication of the momentum behind stocks. And it has turned out to be prescient in recent years.
But beware of crafting a strategy solely on this theory, or any other technical theory or fundamental indicator. Each year is unique, as the factors impacting the market are constantly changing.