January Barometer Predicts A Down ’21, Although Track Record Of ‘Down Jan’ Mixed

The January barometer is not boding well for US equity bulls. That said, they can take solace in the fact that the maxim’s record is poor when January is down versus when it is up. Besides, the first five sessions were up this year. Plus, not all major US equity indices were down last month.

The January barometer is predicting a down year this year. The adage posits that as goes January so goes the year. Although the track record of a down January, which is the case this year, is mixed.

Chart 1 plots the annual returns for the S&P 500 going back 70 years, to 1951. The year 2021 is marked with a question mark. The data is divided into four buckets: (1) years that were up when January was up, (2) years that were down when January was up, (3) years that were down when January was down, and (4) years that were up when January was down. In parenthesis is the number of years corresponding to each bucket.

It turns out the barometer’s success rate is very high when the month is up. Out of the 70 years, there have been 42 years in which January was up. Out of those 42, the index went on to have a positive year in 37 of them; only five were down.

January was down in 28 of the 70, of which 14 ended up for the year and 14 down – essentially a coin toss. This year, markets got off on a high note. Until the 26th, the S&P 500 was up 3.1 percent, before offers began overwhelming bids. By the time the month was over, it was down 1.1 percent.

January unfolded similarly last year. Through the 22nd, the month was up 3.3 percent, but ended down 0.2 percent in the end. But the January barometer failed to live up to expectations as the year was up 16.3 percent.

Last year, January was not weak across the board. The Dow Industrials and the Russell 2000 Small Cap Index (IWM) were down one percent and 3.3 percent respectively, but the Nasdaq Composite rallied two percent. Major indices diverged this year as well, with the Dow (DIA) down two percent but the Nasdaq Composite (COMP) and the Russell 2000 were up 1.4 percent and five percent respectively.

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