What can the “January barometer” tell us about the rest of this year?

The first month of the year is behind us and despite what feels like a year’s worth of market drama, the US sharemarket posted another healthy gain.

It rose 1.4 per cent in January, a very solid return that was above the 1.1 per cent average for all of the January’s since 1950.

That bodes well for the balance of this year, according to the “January Barometer”.

Coined by Yale Hirsch in the 1970s, this suggests that the market’s performance in January will predict how the balance of the year will play out.

We all know that the economic and financial landscape can change on a dime, and there’s nothing special about any month of the year, January included. However, a solid January performance has typically meant a good year is ahead

If you prefer to listen to a podcast episode on this topic: 

Since 1950 the S&P 500 has been up 74 per cent of the time and the average annual return has been 9.6 per cent.

However, when the market has been up in January the future looks even brighter.

The odds of a positive calendar year jump to 89 per cent, with the average annual return a very healthy 16.9 per cent.

In contrast, when the index is down in January, the odds of an up-year slump to just 50 per cent, while the median annual return slips marginally into negative territory.

As interesting as these statistics might be, we should never base an investment strategy around them.

The January Barometer won’t always work, just like “Sell in May and go away” won’t always be the right move and a “Santa Rally” doesn’t arrive every single year.

Similarly, the yield curve also had a great track record of predicting recessions, until it didn’t.

Markets change, curveballs arrive and some trusted indicators can become less accurate.

That doesn’t mean they aren’t useful, it just means they are better interpreted as rules of thumb, rather than rules to live by.

To be fair, the link between January and the rest of the year has been more tenuous in recent decades.

In the last 25 years the direction of the S&P 500 during January and the whole year have only lined up on 14 occasions, which is 56 per cent of the time.

The relationship was much stronger before that, and between 1950 and 2000 the correlation was 82 per cent.

A good start to the year doesn’t guarantee that strength will continue, but it does set the tone.

The S&P 500 has started 2026 on a solid footing.

Not only is the index up, but we’ve seen a broadening out of the strength.

It hasn’t been the Magnificent 7 or the tech sector leading the charge, with those parts of the market underperforming in recent months.

Smaller companies have been doing extremely well, while the strongest sectors in January were energy, materials and consumer staples.

In the weeks ahead markets will need to get to grips with the appointment of a new Federal Reserve Chair, another partial US government shutdown and some big swings in currencies, crypto and precious metals.

Beyond that we’ll have to navigate the US mid-term elections, ongoing concern over government debt levels and any number of geopolitical issues that could emerge.

At the same time, economic growth is solid, inflation is contained, the Fed is likely to cut rates at last once or twice, and earnings growth is still looking reasonable.

We’re all expecting the usual ups and downs over the next eleven months, but the early signs are healthy.

The robust January performance won’t decide the year on its own, but we’ve started on a sound footing.

Market Insights enewsletter

Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.

Subscribe Now