An old adage on Wall Street suggests, “So goes January, goes the year.” With stocks seeing one of the best January returns ever, it is time to take a closer look at the January barometer. The January barometer was first discussed by Yale Hirsh of the Stock Trader’s Almanac in 1972. Simply put, if the first month of the year is green, it bodes well for the rest of the year and vice versa if we see a red January.
Looking at the numbers confirms that when the S&P 500 Index is green in January the rest of the year (final 11 months) is up 12.2% on average, well above the average return of 7.9% over the final 11 months of the year; but when that first month is red the final 11 months are up only 1.2% on average. According to Ryan Detrick, Senior Market Strategist, “The January barometer isn’t perfect, but it does have a pretty solid track record. Now where things really get interesting is when that first month is up more than 5% (like 2018 is on track to be), the return over the final 11 months actually gets stronger.”
Of course we don’t suggest simply investing based on what the first month does, but with the overall global economic backdrop and corporate earnings growth as strong as it appears to be, this is yet another sign that 2018 may see a continuation of the bull market.
In all the instances when the S&P 500 was up more than 5% at the end of January, the full year return has never been negative (higher 12 out of 12 times); but it is worth noting that they weren’t smooth rides. The average peak-to-trough correction was 10.7%, while the smallest intra-year pullback was -4.4%.
As we noted in our recent Weekly Market Commentary, we are on the lookout for added volatility in 2018 as the economic cycle ages, but we would use any pullbacks to add to portfolio positions. This study is another example as to why we expect the bull to continue, but to be ready for a potentially bumpy ride.