January Barometer and The Pursuit
Earlier this week we wrapped up the first month of 2023, and I’d bet we all feel pretty good about the 6.28% return for stocks in January (for the second best January in the last three decades). Needless to say, this was a breath of fresh air after last year’s market turmoil.
In the wake of January’s performance I’ve heard rumblings in the news of the January Barometer. This is a belief held by some investors that stock market performance in the month of January is a predictor of how the rest of the year will play out. If January is positive for stocks, the year will be positive. If it’s negative, watch out!
(Spoiler: I don’t subscribe to this approach).
I was curious how has this approach faired historically, so I pulled the data… But first, some observations:
- In the table below the blue shaded years indicate times when January’s return (either positive or negative) coincided with a positive or negative year (i.e. blue shaded years is when the barometer was accurate). Of the 33 years below, 19 of them had a matching January performance to the entire year and 14 had mismatched performance.
- Most recently, last year showed a negative January (-5.17% decline) and the year ended up down 18.11%… Good January Barometer.
- But the year before that (2021) showed a -1.01% return in January and a whopping 28.71% return for the whole year…Bad January Barometer.
Below you can see each year since 1990:
Source: YCharts. S&P 500 Total Return Index.
*Past performance is not indicative of future results. For educational purposes only.
As I look at data like this, a couple things jump out:
1) Remember my blog from a couple weeks ago about how historically bad 2022 was for financial markets? (here it is) Well, last month was the second best January return in three decades. Things can turn quickly.
2) I immediately wonder how a market-timing approach using the January Barometer might perform. So I did some math:
A hypothetical $100 invested at the beginning of 1990 would have grown to $2,155.46 during this period. This is the proverbial buy-and-hold approach.
If an investor sat out every January and bought in for February-December when January was positive and stayed in cash when January was negative, the compounded growth would have been just $1,094.94.
Simply put, using the January Barometer over to decide whether or not to invest for the remainder of the year would have led to about half as much cumulative wealth.
The math is pretty clear. If you have time to invest, following these kinds of market timing indicators and gimmicks is not often reliable and effective.
But there’s one other observation that’s more important than any figure above:
Your pursuit of returns is just that: YOUR pursuit.
Even if the data above was compelling in favor of the January Barometer, I’m not a believer in selling your investments because an indicator says you should….If you have a sound strategy you should be selling investments when it’s time to write a check for your children’s college tuition, or for your monthly retirement income, or because you went to the Barrett Jackson car auctions last week and bought your dream machine.
Once you know what things you might want (like tuition, retirement, cars, etc.) we can determine how to invest to pursue those things. Our job as the advisor is to help bridge the gap between your unique pursuit and the broad array of investment options.
Indicators strip every personalized element from the investment process. Yet, the personalized element is all that matters.
In short, don’t worry about January; worry about whether or not you’re clearly aligning your money with your values — everything else will fall into place.
Until next time.
Adam Harding
CFP | Advisor | Financial Meteorologist
www.hardingwealth.com
