Putting the January Barometer to the Test

The January Barometer, when faced with investor pessimism, gets even stronger

Senior Quantitative Analyst
Feb 1, 2023 at 8:13 AM
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The S&P 500 Index (SPX) gained over 6% in the first month of 2023. This has been a good omen going forward, according to the January Barometer, a theory that the performance of stocks in January can predict how the rest of the year will turn out. Whether the beginning of the year creates some sort of momentum for the stock market or perhaps it’s just randomness, the tendency has been observed. I’ll go over the numbers below and add some layers to adapt it to our current market 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 barely over 2% for the rest of the year, with 60% of the returns positive. It seems that the momentum in the first month of the year continues for the next 11 months.

SPX Feb Dec Returns

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 40% of the returns positive.

SPX Feb Returns

Last month was a stronger January than normal with that healthy 5.x% pop. The table below shows data for when January was up or down by at least 4%. The January Barometer becomes an even better indicator when the monthly gain or loss is at a higher magnitude. When January has gained at least 4%, the rest of the year averaged a return of about 14.5%, with 90% of the returns positive. After a 4% loss or more in January, the rest of the year has averaged a gain of not even 0.5% and 54% of the returns positive.

January Barometer 3

It’s the same conclusion for February. After an especially strong January, February has averaged a return of 0.88% with 67% of the returns positive. When January has been down 4% or more, February has had an average loss of 1.75% with only 31% of the returns positive.

SPX Jan Barometer Feb

The tables below show how the numbers play out when I layer in sentiment data from the Investors Intelligence (II) sentiment survey. In the latest survey, 45% of newsletters are 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 positive January based on the percentage of bulls in the II poll at the end of January. Since 1963, the first year we have data on the II sentiment survey, there have been 15 other occurrences where January was positive, and the percentage of bulls was below 50%. In these years, the S&P 500 has averaged a rest-of-year return of 14.4%, with 93% of the returns positive. When the II poll shows more optimism, the rest of the year averaged a gain of less than 7% with 75% of the returns positive. This has been an especially good situation for February as well. In years like this in which January was positive with less than 50% of the survey bullish, February averaged a gain of 2% with 73% of the returns positive. When January has been positive with more bulls, February averaged a slight loss with 60% of the returns positive.

SPX Jan Barometer II

Finally, for those curious, the table below shows the specific years in which January was up by 4% or more and the percentage of bulls in the II poll was below 50%. This is our current situation. In six prior instances, the S&P 500 has been positive every time with an average return of 15.9%. Four out of six returns have seen gains of more than 18%. February has averaged a gain of 2.4% with four of six returns positive. The last instance was in 2019. That year, the index gained about 3% in February and 19.5% for the rest of the year.

SPX Jan Bar Investor Intelligence

 

 

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