At first glance, you should already be questioning the validity of this article based on the title, alone! Can anything really predict the stock market?! As it turns out, there one statistic that has a pretty good track record when it comes to predicting the outcome of the S&P500 each year. It’s called “The January Barometer,” invented by Yale Hirsch decades ago, and it has an 87.9% success rate. Not bad…
You may have heard the saying, “As January goes, so goes the rest of the year.” Translated, if the month of January is positive, then the statistic reports that the entire year will end positive as well. This is the essence of the January Barometer (JB).
There have only been 8 major errors in the JB since 1950:
- Vietnam adversely affected performance 1966 and 1968,
- Two rate cuts and 9/11 affected the results in 2001
- January 2013 was held down by the anticipation of military action in Iraq
- The Great Recession affected 2008, and
- Federal Reserve stimulus and rate talk influenced both 2010 and 2014
Otherwise, when the S&P500 is positive in the month of January, the stock market ends positive in those years 87.9% of the time.
So how did January end up in 2017? Last month ended in positive territory, to the tune of 1.79%. Believe it or not, this is the first time in four years that we’ve had a winning January. In fact, the last time we had a positive January Barometer was in 2013, when the market finished up 29.6% that year.
Taking things one step further, there are two other statistics that we pay close attention to at our office each year (also from Yale Hirsch’s Stock Trader’s Almanac).
- The Santa Claus Rally – The last few trading days of the year
- The First Five Days of the new year.
Aside from the January Barometer being up, we had a positive Santa Claus Rally and we also observed a positive First Five Days of 2017. The combination of these three historical statistics (called the “January Indicator Trifecta) have an even better track record than the JB alone. This happens to be the 28th time since 1950 that all three have been up.
Below you can see the S&P500 chart that maps out the difference in average returns, comparing the years when:
- The Trifecta occurs,
- The returns in all post-election years (which happens to be the worst year of the four-year cycle, by the way),
- 2017, and
- Post-election years when the January Trifecta is positive.
In summary, it is always possible to experience unexpected headwinds that can emerge from any market, however positive the statistics may appear. Politics, war, and other outside factors can influence the markets and change things on a dime.
In addition, February happens to be the seasonally worst month for the S&P500 in post-election years, so especially after a positive January Trifecta, it wouldn’t be a surprise to see the market struggle to get traction this month. With all that said, despite a slew of executive orders and political disrupt, the market has largely held up very well, all things considered.
While it would be entirely within the normal statistical range for 2017 to end up as one of the 12.1% of the years when this probability doesn’t pan out, I think it would be fair to say, “The odds are in the market’s favor this year.”
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Till next time…