Around this time of year, we often hear the maxim “As January goes, so goes the year”. That is, if the market ends lower in January 31 vs. January 1, then it will likely also end lower on December 31 vs. January 1, and vice versa. Is this maxim reliable, or just a myth? I set out to find the answer, using 40 years of price data from the Google Finance API.
I create data panels based on market index (Standard & Poor 500, Nasdaq, Dow Jones Industrial Average) and two twenty-year windows (1980-2000, and 2001-2021). In all, there are six data panels; the table below is one of them.
In the table, price_jan_first is the closing index level for the first trading day of the year (e.g. Jan. 2, 3, etc.). price_jan_last is the closing index level for the last trading day of January. price_dec_last is the closing index level for the last trading day in December. To the right of price_dec_last are flags with values 0 or 1 (0 = false, 1 = true) to indicate the direction of the index. If the index moved up from the beginning to the end of January, then jan_up = 1, otherwise jan_up = 0. When the index went down in January, then jan_down = 1, etc. When the index ended higher for the year (last of December vs. first of January), then dec_up = 1.
The key variable to focus on is the last column: same_dir. We want to count the number of occurrences when same_dir = 1; this is when the index moves in the same direction in January as it does from January to December (both up or both down). In the table above, there are 11 such occurrences in the S&P 500 from 2001 to 2021. For brevity, I will not show the other five panels, but you can view them at the link below:
Below is a summary of my findings from the six data panels. The bar chart shows the number of years that January Barometer was reliable (i.e. returns moved in the same direction as yearly returns) for each twenty-year window and market index.
Number of Years When January Barometer Was Reliable
The table below shows the reliability rate:
Is The Myth Busted?
Yes! As one can see from the data above, the reliability rate in the last two decades is virtually a coin toss. This was not the case three to four decades ago, when the reliability was much higher, even nearly perfect for the Dow. There could be many reasons for this divergence, which deserve more thorough investigation, but I would submit that the main reasons might include:
1) technological advances (e.g. faster computers that enable high frequency trading by professional traders; the internet and smart phones, which give retail traders more access to the markets), and
2) globalization of capital (investors can move funds across borders through mutual funds and ETFs); economists describe this as fungible capital.
In conclusion, the maxim “As January goes, so goes the year” should be modernized to something like: “What happens in January will probably stay in January”.