There’s a saying in investing: “As January goes, so goes the year.” Known as the “January barometer,” this adage suggests that the US stock market’s performance in January can help predict positive or negative returns for the remainder of the year. Specifically, if the US stock market has positive returns in January, the theory suggests that the rest of the year should also have positive returns. But if January returns are negative, the January barometer suggests investors can expect losses during the remainder of the year.
The idea was first shared by Yale Hirsch in the Stock Trader’s Almanac over 50 years ago, and it remains popular to this day. But should you put much stock in the power of the January barometer? And more importantly, should you modify your investing behavior based on its predictions? Read on for our take.
What history tells us about the January barometer
We analyzed nearly a century of market data to understand for ourselves how likely the January barometer is to accurately predict positive or negative US stock market returns for the rest of the year. While the January barometer often refers to the S&P 500 specifically, we used total stock market data to enable us to run the analysis over a longer period of time. We used monthly and annual US stock market returns (using the full US total market return series from Ken French’s website, which includes both large- and small-cap US stocks) from January 1927 to December 2023, and compared each year’s January-only returns to its returns for the remainder of the year.
In years where both January returns and rest-of-the-year returns were either positive or negative, we consider the barometer to have been correct in its prediction. In years where January returns were positive and rest-of-the-year returns were negative, or vice versa, we consider the barometer to have been incorrect. The graph below illustrates just how often the barometer has correctly predicted positive or negative returns for the rest of the year since 1927—just under 62% of the time.
These odds may be better than a coin flip, but they are very far from a guarantee.
The chart below illustrates this data in a different way. Each dot on the plot below represents a year, with 2023 omitted because full-year returns were not yet available from Ken French’s website at the time of publication and thus could not be plotted. Orange dots denote years where the barometer was incorrect, while green dots mark years where it was correct.
Why you should be skeptical of the January barometer
It’s a cardinal rule of investing that past performance is never a guarantee of future results. January returns may have occasionally given investors some sense of whether US stock market returns for the rest of the year are likely to be positive or negative, but these predictions have some serious limitations. Let’s look at three reasons you probably shouldn’t modify your investing strategy in response to January’s US stock market returns.
The January barometer only applies to the US stock market
First, the January barometer theory only applies to the US stock market. If you hold a diversified portfolio (like Wealthfront’s Classic or Socially Responsible portfolios), then you likely own a wide range of investments in asset classes beyond just US stocks. As a result, the January barometer won’t tell you much about the full-year performance of your entire portfolio because it is made up of so many other investment types.
Investing according to the January barometer is a form of market timing
Second, changing your investing strategy in response to January returns is a form of market timing. And unfortunately, market timing rarely works. If you’re unnerved by negative returns in January one year, you might be tempted to sell your investments and wait for a “better time” to invest. But a more productive response would be to take a long view of the situation. Even if you knew the US stock market will have negative returns this year (and to be clear, it’s impossible to know that in advance), you’d probably still want to keep making regular investments while US stocks were effectively “on sale.” And should you decide to wait on the sidelines, that choice could have serious consequences for your portfolio, because returns tend to be disproportionately impacted by a small number of key days.
Experts have some serious doubts about the January barometer
And finally, it’s worth noting that experts have some serious doubts about the January barometer. Its record is far from perfect, and it has been wrong recently—both in 2021 and 2018. A Wall Street Journal article from 2017 calls the January barometer a “market myth” and points out that further statistical analysis doesn’t support the idea. US stocks have risen most years. If you predicted the US stock market would go up each year from February to December regardless of January’s performance, you would have been right 75% of the time since 1927 (compared to 61.9% of the time if you used the January barometer).
The bottom line? It’s impossible to predict the future, and we don’t think you should bother trying. No matter how US stocks perform in January (or any month of the year for that matter), we think it’s wise for investors to focus on the long term and keep steadily adding money to their investment portfolio.
The information contained in this communication is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as a solicitation, offer or recommendation to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers, Wealthfront Brokerage or any affiliate endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.
Investors may experience different results from the results shown in the visuals above. No representation is being made that any client account will or is likely to achieve performance returns or losses similar to those shown. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Changes in the assumptions may have a material impact on the data presented. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities.
All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Historical returns, expected returns, and probability projections are provided for informational and illustrative purposes, and may not reflect actual future performance. Please see our Full Disclosure for important details.
Investment management and advisory services are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC-registered investment adviser, and brokerage related products, including the Cash Account, are provided by Wealthfront Brokerage LLC, a Member of FINRA/SIPC.
Wealthfront, Wealthfront Advisers and Wealthfront Brokerage are wholly owned subsidiaries of Wealthfront Corporation.
Copyright 2024 Wealthfront Corporation. All rights reserved
About the author(s)
Fang Rui is a Chartered Financial Analyst (CFA) and an investment researcher at Wealthfront. Prior to Wealthfront, Fang spent nearly a decade at BlackRock where she worked in ETF and index research as well as risk management. She earned a Master of Science in Industrial Engineering and Operations Research from University of California, Berkeley and earned a Bachelor of Science in Engineering with a major in Operations Research and Financial Engineering from Princeton University. View all posts by Fang Rui, CFA