The twenty-fifth has finally arrived and it's time to talk about the January Barometer.
The concept of the barometer is simple: if stocks go up in January, they should go up all year long. Likewise, if stocks go down in January, they will be lower throughout the year.
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It works most of the time. The Stock Trader's Almanac says he has been right 84% of the time since 1950.
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It worked in 2023 and 2024. The S&P 500 rose 6.2% in January 2023 and ended the year up 24.3%. In 2024, the S&P 500 ended January with a relatively modest gain of 1.02%. Profit for the year: 23.3%.
And it worked in a bad market in 2022: The index started the year down 5.3% and ended the year down 19.44%. Thanks to the Federal Reserve's campaign to reduce inflation.
How the barometer got its name
The barometer was named in 1972 after the late Yale Hirsch, founder of the Stock Trader's Almanac, a widely read investment guide. He had been involved in investment research for years and, armed with music experience, discerned the pattern.
It is not infallible. It does not guide the markets. It won't tell you to buy Apple and Walmart and sell JP Morgan Chase and Tesla. And the patterns themselves don't work in a vacuum.
It does suggest, based on history, the environments an investor might face when making a buy or sell decision.
Consider 2008, when the January Barometer was painfully and spectacularly right. In January, the S&P 500 fell 6.1%, the Dow Jones Industrial Average fell 4.6%, and the Nasdaq Composite plummeted 9.9%.
At the end of the year, the S&P left investors down 38.5%. The Dow Jones had fallen 33% and the Nasdaq 40.5%. The Great Recession had disrupted everything.
How could that big drop happen when all three indexes had been higher in early 2007?
The answer is that stocks rose for much of 2007, but the pressures erupted in the summer, with deep problems in the housing sector: overbuilding, out-of-control prices and suddenly sour mortgages.
The major stock indices reached all-time highs in October 2007 and then fell sharply. The S&P's peak occurred on October 9, followed by an 8.1% drop on December 31.
And then 2008 came and the bad situation got much worse.
Lately, due to the Covid-19 pandemic, a sharp rise in inflation, economic upheavals, dangerous political problems in the Middle East and Russia, and tense American politics, the January Barometer has been a little less accurate: correct five of the last nine years. , or a 55% profit rate. But his fans still pay attention to him.
Yes, the January Barometer has criticism
People who study the markets claim to despise the barometer, especially if an investor uses it to time the stock market. It is better, they say, to use the barometer as a way to measure the health of the market.
Of course, in part because the barometer does not work in a vacuum, some other issues must be taken into account.
- The barometer works best with the S&P 500. The theory doesn't work as well with foreign indices.
- The stock market goes up about two-thirds of the time, regardless of what happens in January.
More stock returns in 2024
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The year 2020 is the perfect example. In January the S&P 500 fell 0.16%. Bit. But then the Covid-19 pandemic arrived. By the end of March, the S&P 500 had fallen 20%.
But the vaccines worked, the weather improved, the pandemic subsided, and people started living their lives again, spending money and shopping. By the end of the year, the S&P 500 was up 16.3%.
The S&P 500 and Dow fell in January 2021, ending the year up 26.9% and 18.7%, respectively.
What else does the Almanac tell investors?
So the index lives on, in part because thousands of investors are fans of the Stock Trader's Almanac, updated annually by Yale Jr. Jeffrey Hirsch. Its more than 200 pages are a treasure trove of trivia and concentrated data about the market.
The almanac has provided two more fragments of the stock market tradition that people follow.
- The Early Warning System, a subset of the January Barometer. He posits that a gain for the S&P 500 in the five days of January is a good sign for the year. This has its followers, but five days is very few, especially in a year with a lot of volatility like 2022.
- The Santa Claus Rally takes place on the last five business days of December and the first two days of January. It remains to be seen if the rally will be successful this season. As of December 31, the S&P 500 was down 0.85% over the first five days, the Dow was down 1.5%, and the Nasdaq was down 2.3%. But futures trading into the early hours of Thursday suggested markets would see a solid rebound at the open.
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