The January Barometer is one of Wall Street’s favorite seasonal gauges. According to the Stock Trader’s Almanac, it has registered only nine major errors since 1950 and been accurate 74.6 percent of the time. If relatively flat years are excluded, the accuracy rate gets even better: 86.6 percent.
But in a year when a lot of old saws are not working, this may not be accurate in 2018: January saw a gain of 5.6 percent, but the S&P 500 is down 7 percent so far.
Regardless, interest for this coming January remains high because every down January on the S&P since 1950, without exception, preceded a new or extended bear market, a flat market, or at least a 10 percent correction.
Why does the January Barometer have such a strong track record?
In 1972, Yale Hirsch, founder of the Stock Trader’s Almanac, discovered that the Lame Duck Amendment to the Constitution changed the political calendar, and the January Barometer was born. The Lame Duck Amendment was adopted in 1934; it moved the beginning and end of the terms of the president and vice president from March 4 to Jan. 20, and members of Congress from March 4 to Jan. 4, essentially shortening the lame duck period from the election and inauguration of the president from four months to two months.
The recent history of the January Barometer has been mixed. 2008 was the worst January on record and preceded the worst bear market since the Great Depression (S&P down 38 percent that year). But down Januaries in 2009, 2010 and 2014 did not produce negative years, though they did foretell corrections.
A negative reading in 2015 did produce a modestly down year (down 0.7 percent), but equally important, a negative January in 2016 (down 5.1 percent) produced a bear market decline (20 percent off the highs) by February 2016.
With a strong track record and so much market confusion around economic risk (China slowing, tariffs), rate hike risk, and political risk, it’s little wonder that traders are eager to get out of December and into January.
But even if January proves to be a down month, there’s always a bright side: “Down Januaries were followed by substantial declines averaging minus 12.9 percent, providing excellent buying opportunities later in most years,” according to the Stock Trader’s Almanac.