What the January Barometer Could Mean for the Year

The S&P 500 just marked its worst January in 13 years

Senior Quantitative Analyst
Feb 2, 2022 at 8:00 AM
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The S&P 500 Index (SPX) just suffered its worst January since 2009, losing 5.3% during the month. This is a bad signal going forward according to the January Barometer. The January Barometer is the theory that the performance of stocks during the month of January can predict how the rest of the year will be. Perhaps it’s randomness, but the tendency has been observed. I’ll break down the numbers for the S&P 500 in regard to the January Barometer and add some layers to adapt it to our current environment.

As Goes January

It’s a simple concept, but as you can see in the table below, it has been a dependable indicator. Since 1950, when the S&P 500 was positive in January, the rest of the year saw an average return of nearly 12%, with 86% of the returns positive. After a down January, the index gained on average just 2.65% for the rest of the year and just over 60% of the returns positive. It seems that the momentum in the first month of the year continues for the next 11 months.

IotW Feb1 Chart 1

The tendency has been just as strong in the short term too. The table below shows S&P 500 data for just February. After a positive January, February has averaged a gain of 0.68% with 65% of the returns positive. Otherwise, the S&P 500 has averaged a 1% loss in February with just 41% of the returns positive.

IotW Feb1 Chart 2

I mentioned that this past January saw an especially big loss of more than 5%. The table below shows data for when January was up or down by at least 5%. For the February through December returns, the numbers look similar to when January is positive or negative by any amount

IotW Feb1 Chart 3

For February, however, the bigger the gain or loss for January intensifies the January effect. February, after a 5% or more gain in January, has averaged a 0.76% gain with 71% of the returns positive. When January has been down 5% or more (the situation we’re in now), February has had an average loss of 1.61% with only a third of the return positive.

IotW Feb1 Chart 4

The tables below show how the numbers play out when I layer in sentiment data from the Investors Intelligence (II) sentiment survey. In that survey, 34.9% of newsletters were bullish on the market (the choices are bullish, bearish or short-term bearish while longer term bullish). That’s on the lower side of historical readings, although not extremely low.

I broke down the S&P 500 returns after a negative January based on the percentage of bulls in the II poll at the end of January. The current reading is in that far left column but very close to being in the middle column. For the rest of the year, the low number of bulls in this poll takes some of the sting out of the January Barometer. In the eight occurrences of a negative January while the percentage of bulls was below 35%, the index averaged about a 5% return for the rest of the year, with 75% of the returns positive. So, the underperformance hasn’t been as bad. The second table below shows just how February has performed. In the short term, the II poll has meant less. In this case, the S&P 500 still averaged a loss of over a percent with just 38% of the returns positive.

IotW Feb1 Chart 5

Finally, for those curious, the table below shows the specific years in which January was down by 5% or more and the percentage of bulls in the II poll was below 35%. This is our current situation. You can see February was a little mixed with two of four returns negative. On a positive note, the rest-of-year returns were positive all four times averaging a gain of about 8%. The last occurrence was in 2016. February fell hard by 5% but then the rest of the year ended up being positive by over 15%.

IotW Feb1 Chart 6


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