The January Barometer — A Broken Instrument or Valuable Tool?
“As January goes, so does the year.” It’s the catchy saying to remember the January Barometer.
Its insight is simple. The direction that January takes predicts how the S&P 500 Index will do throughout the rest of the year.
But it is not always an accurate prediction. Two of the last three years, the barometer was wrong.
Last year was off to a historic start.
The S&P 500 surged over 5% in the first month of 2018, just before it plunged in February.
That was the barometer’s latest failed prediction. The year went on to finish at a 6.6% loss.
In 2016, it anticipated a down year. January kicked it off with a 5% decline.
By the end of the year, however, the S&P 500 was up nearly 10%.
This made many analysts skeptical when reading the barometer. They view it as broken.
Yale Hirsch was the first to notice the January Barometer back in 1972.
And the last in-depth academic study on the anomaly was 15 years ago.
So, is it a broken instrument?
Or is there still predictive value in the first month of the year?
I don’t want to ignore the performance in January … and what it means for 2019.
The Barometer Brings a Positive Prediction
It looks like another positive January will be in the books come the first day of February.
The January Barometer tells us to expect the rest of the year to remain in positive territory. And I’m sticking with it.
Since 1938, the barometer has had a track record of predicting the direction of the stock market with greater than 70% accuracy.
It tells us there’s a 70% chance stocks will be higher at the end of the year.
To understand why this barometer is still a powerful tool to predict the stock market, we have to look at why it became relevant to begin with — politics.
Barometer Accuracy Through the Ages
Congress adopted what’s called the lame duck amendment in 1935.
It shortened the period between the election and inauguration of presidents, vice presidents and Congress members.
It moved the beginning of the term for the president and vice president from March 4 to January 20. And it moved the start date for members of Congress from March 4 to January 4.
As a result, investors were bombarded with both a new Congress and a presidential State of the Union address in January.
Wall Street’s reaction to this influx of news set the tone for the year.
There are still a few days left before the end of the month, so I want to highlight what to expect if the returns are negative for the month.
Since the 1950s, every time January finishes lower on the S&P 500 Index, it precedes either a new or extended bear market, a flat market or at least a 10% correction — without fail.
This is more than enough to highlight the importance of January.
Despite the recent stumbles for its predictions, I still view the January Barometer as the definitive guide on how the year is headed.
With a better than 70% chance of the broad markets rallying in 2019, it’s a great time to be invested.
If you are wondering where to park your capital and benefit from the ensuing rally, take a look at small-cap stocks.
The SPDR S&P 600 Small Cap ETF (NYSE: SLY) is a great place to go.
Small-cap stocks, those with a market cap between $300 million to $2 billion, tend to be more volatile than larger stocks. But they also have a history of outperforming during rallies.
This exchange-traded fund will help you outperform while 2019 makes a comeback.
Chad Shoop, CMT
Editor, Automatic Profits Alert