January has quite a reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations has historically propelled stocks higher. January ranks #1 for NASDAQ (since 1971), but fifth on the S&P 500 and DJIA since 1950. January is the last month of the best three-month span and holds a full docket of indicators and seasonalities.
DJIA and S&P rankings did slip from 2000 to 2016 as both indices suffered losses in ten of those seventeen Januarys with three in a row, 2008, 2009 and 2010 and then again from 2014 to 2016. January 2009 has the dubious honor of being the worst January on record for DJIA (-8.8%) and S&P 500 (-8.6%) since 1901 and 1930 respectively. The early stages of the Covid-19 pandemic spoiled January in 2020 & 2021 as DJIA, S&P 500 and Russell 2000 all suffered declines in 2020. In 2021, DJIA and S&P 500 declined.
In midterm years, January ranks near the bottom since 1950. Large-caps have been the worst with S&P 500 ranking #10 (third worst) and DJIA ranking #9. Technology and small-cap shares fare slightly better in the rankings, but small-cap average performance is still negative and NASDAQ is only barely positive.
On pages 112 and 114 of the Stock Trader’s Almanac 2022 we illustrate that the January Effect, where small caps begin to outperform large caps, actually tends to start in mid-December. Early signs of the January Effect can be seen when comparing the Russell 2000 to the S&P 500 since around December 15. Historically, the majority of small-cap outperformance is normally done by mid-February, but strength can last until mid-May when indices typically reach a seasonal high.
The first indicator to register a reading in January is the Santa Claus Rally. The seven-trading day period began on the open on December 27 and ends with the close of trading on January 4. Normally, the S&P 500 posts an average gain of 1.3%. The failure of stocks to rally during this time has tended to precede bear markets or times when stocks could be purchased at lower prices later in the year.
On January 7, our First Five Days “Early Warning” System will be in. In midterm election years this indicator has a poor record. In the last 18 midterm election years 8 full years followed the direction of the First Five Days. The full-month January Barometer has a slightly better record in midterm election years with 10 of the last 18 full years following January’s direction.
Our flagship indicator, the January Barometer created by Yale Hirsch in 1972, simply states that as the S&P goes in January so goes the year. It came into effect in 1934 after the Twentieth Amendment moved the date that new Congresses convene to the first week of January and Presidential inaugurations to January 20.
The long-term record has been stupendous, an 84.5% accuracy rate, with only 11 major errors since 1950. Major errors occurred in the secular bear market years of 1966, 1968, 1982, 2001, 2003, 2009, 2010 and 2014 and again in 2016 as a mini bear came to an end. The tenth major was in 2018 as a hawkish Fed continued to hike rates even as economic growth slowed and longer-term interest rates fell. Historical levels of support from the Fed and Federal governments in 2020 quickly undid the market damage caused by the Covid induced economic shutdown. 2021 was the 12th major error for the January Barometer. The market’s position on the last trading day of January will give us a better read on the year to come. When all three of these indicators are in agreement it has been prudent to heed their call.