CandleFocus Glossary Editor
The January Barometer is an investment prediction tool which applies specifically to the S&P 500 index of the United States stock market. It states that if the S&P 500 Index rises in the first month of the year, January, then the index will close the year higher than it began, and vice versa if it falls. Popularized by the Stock Trader's Almanac in 1972, it suggests that the performance of the S&P 500 Index in January is a reasonable predictor of how the market will fare for the rest of the year.
Proponents of the January Barometer argue that, in the long run, stocks generally experience positive returns, and that if the market begins the year with a negative return, it is unlikely to finish the year with a positive return. Furthermore, supporters of the hypothesis contend that when the market falls in the first month of the year, the losses will tend to be sustained through the remainder of the year.
However, not all investors and traders accept the January Barometer as a reliable tool for predicting stock market returns for the year. Studies have revealed that the hypothesis does not hold up in practice, particularly over the longer term. Over the past 40 years, the S&P 500 Index has experienced positive returns at the end of the year following a negative opening in January just 36% of the time. As such, any confidence in the January Barometer as a tool to make investment decisions must be tempered.
Despite its questionable accuracy, the January Barometer remains a popular concept among traders, many of whom use it as a loose guide for stock market decisions. However, for most, the unpredictable nature of markets makes this hypothesis an unreliable tool for predicting long-term performance or for setting an investing strategy.
Proponents of the January Barometer argue that, in the long run, stocks generally experience positive returns, and that if the market begins the year with a negative return, it is unlikely to finish the year with a positive return. Furthermore, supporters of the hypothesis contend that when the market falls in the first month of the year, the losses will tend to be sustained through the remainder of the year.
However, not all investors and traders accept the January Barometer as a reliable tool for predicting stock market returns for the year. Studies have revealed that the hypothesis does not hold up in practice, particularly over the longer term. Over the past 40 years, the S&P 500 Index has experienced positive returns at the end of the year following a negative opening in January just 36% of the time. As such, any confidence in the January Barometer as a tool to make investment decisions must be tempered.
Despite its questionable accuracy, the January Barometer remains a popular concept among traders, many of whom use it as a loose guide for stock market decisions. However, for most, the unpredictable nature of markets makes this hypothesis an unreliable tool for predicting long-term performance or for setting an investing strategy.