What is the January Barometer?
The January barometer posits that gains in the S&P 500 index for the month of January predict market gains for the entire year.
How Does the January Barometer Work?
The January barometer is based on the view held by many in the stock market that the performance of the S&P 500 index between the first and 31st of January reliably forecasts the stock market's performance for that year. That is, if the S&P 500 index is higher towards the end of January than it was at the beginning, then stock prices will be higher at the end of that year than they were at the beginning of the year. Likewise, a decline in the S&P 500 in January forecasts a decline in stock prices over the year.
For example, suppose the S&P 500 opens at 1000 on the first of January and closes at 1100 on the 31st of January. Investors and analysts who follow the January barometer believe this signals overall stock market gains for the coming year.
The January barometer has been accurate 90% of the time based on stock data from 1950 forward.
Why Does the January Barometer Matter?
Many investors use the January barometer to determine whether or not to invest in stocks during a given year. Though it is often accurate, merely following the January barometer could result in losses or missed opportunities for gains in a given year when it is inaccurate.