As Goes January, So Goes the Year?

As investors ring in the new year, some may see the occasional headline about the “January Indicator,” “January Barometer,” or “January Effect.”

This theory suggests that the price movement of the S&P 500 during the month of January may signal whether that index will rise or fall during the remainder of the year.

So every February, this indicator gets rolled out in the headlines somewhere making “news” about the market close for January.

Humans tend to look for patterns – as I’m sure you’ll try too looking at the graph in the below article. There is no correlation of the markets and the months. Markets react to unexpected events which happen any month of the year. Ignoring 11/12th’s, or 91.7%, of the year’s time frame ignores quite a bit of time.

I suspect your curious so here’s a useless exercise for those who can’t resist looking and seeking another pattern from MoneyChimp for other months of the year (which doesn’t indicate the standard deviation of those averages and how the returns overlap each other).

Problems with the indicator:

  • US bias – it ignores other international markets as well as the bond markets globally (i.e., diversification and allocation are ignored). This belief suffers from a number of other biases.
  • Hypothesis is that year over year returns for any given month are correlated when returns momentum occurs over shorter periods of time, or longer periods of time, not just in a neat one year time period.
  • Economies and markets grow over the long term – so the effect is really one of growth bias which you see looking at any multi-year graph of market results (e.g., look at “Google Finance” and click on the S&P 500 index, then max chart.

Moral of the story: Properly diversified investing for the long term (I define long term as “the rest of your life,” a.k.a., retirement) is actually the best strategy so you capture all of the returns everywhere and always. Yes, there are down markets now and again – but that is precisely why markets provide greater returns over time – it’s called RISK. A better strategy is to dial in the risk (exposure to the degree of the ups and downs) and adjust the allocation as you age (less time remaining for recovery from misbehaving markets).

Photo by Brooke Lark at StockSnap.

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2 Responses to As Goes January, So Goes the Year?

  1. Carrie Rattle January 25, 2018 at 3:19 am #

    Facts debunking common myths -thank you! Yes humans need patterns, which explains whole trading platforms that brokerages sell when in reality, a strong basis in emotional intelligence may serve them even better with regard to trends. Looking for stock patterns seems akin to being an economist of old, without the behavioral part. Thanks for writing.

    • Larry Frank, Sr. January 31, 2018 at 3:20 pm #

      Thanks for commenting and yes, indeed, behavior is a key component of personal finance success; much more so than people realize! It’s not the markets, but consistent saving without speculation and guessing, that leads to success. Saving means, by definition, not spending everything you make. And yes, the concept scales so normal people can get ahead even easier than the wealthy (who don’t realize what it takes to sustain that standard of living without working their whole lives – unless they really love it and have the health for it). You have a nice blog too by the way!

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