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Markets have started the year with a bang! As of this writing, minus a small patch of volatility, January is shaping up to be a tremendous month, with most equity markets gaining 3.5% to 5%. The one difference this time is that U.S. mid, U.S. small, and European equities are leading the way and outperforming the S&P 500. While it has been only one month, it is encouraging to see.
As I have said numerous times, investors should take short-term moves, good or bad, with a grain of salt. I say this now because there is a term known as the “January barometer” that gains attention every year. The premise is that January reveals what stock performance will be for the full year.
The question is whether there is any substance to this premise or if it’s just another gimmicky statistic.
The January Barometer
As mentioned, January 2025 was a great month for investors. And dating back to 1928, the S&P 500’s annual performance has matched the direction of January ~77% of the time. So, at first glance, the January barometer seems to be a great predictor. Additional research helps put things in perspective.
As we know, markets go up far more often than not. As seen in the chart below, markets have averaged positive monthly returns for the majority of a year!
Source: Yardeni Research.
The S&P 500 has averaged positive monthly returns in nine of 12 months (75%).
Three months (April, July, and December) have higher average returns than January.
Minus September (-1.17%), the two other declines have been negligible: February (-.14%) and May (-.11%).
Does this totally discount the January barometer theory? No, but it paints the picture that stocks generally grind higher.
Also, it should be noted there have been several years when January posted a positive return, yet while markets also ended the year higher, they barely increased for the remainder of the year.
Perhaps the most compelling reason to largely ignore this barometer comes down to random chance. Let’s take a look at a few examples below:
January 2009: The S&P decreased ~8% yet ended the year with a +27% gain.
January 2010: The S&P decreased ~4% yet ended the year with a +15% gain.
January 2016: The S&P decreased ~5% yet ended the year with a +12% gain.
January 2020: The S&P decreased ~1% yet ended the year with a +18% gain.
If someone had sold in January during these years, they would have been kicking themselves. Missing double-digit gains can set an investor back, which then typically leads to chasing returns and trying to time markets. As we know by now, this hardly ever works.
Since markets generally trend higher, the probability of January leading to a higher year isn’t groundbreaking information. In fact, I could argue January’s performance has little relevance, as historically, the S&P 500 has ended the year with a positive return ~70% of the time! This alone should help put an investor’s mind at ease about January being a barometer for the rest of the year.
With that said, you could make the case that a positive January has a small psychological impact since that can be viewed as investors’ confidence in the year ahead.
Given the complexity of markets, no one should spend much time worrying about gains or losses in any single month. I will admit that these can be fun stats to look at, but they should not be viewed as anything else but that.
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