There is a popular urban myth that the stock market’s performance in January predicts the direction of stock prices for the whole year. Unfortunately, there is little statistical support for this belief.
According to Stock Trader’s Almanac this supposed pattern was devised by a legendary market guru, Yale Hirsch in 1972.
But the facts, as covered in a recent Wall Street Journal article by Mark Hulbert, respected editor of the Hulbert Financial Digest, show the January barometer being right only 64% of the time since 1972. Hulbert notes that a mere prediction that the market would go up every year would have been correct 76% of the time over the same period.
It’s fairly easy to recall that January 2016 was one of the worst starts for the stock market in US history. Those who followed the January barometer would have sold stocks in early February and missed the 15 percent or so gain the rest of the calendar year.
2017 has started out strongly for stock returns. But does that mean the year will show gangbuster returns? No one knows.
Superbowl Results- A Stock Market Indicator?
What about the “Super Bowl Indicator”? This urban legend has predicted the stock market’s movement for the year 40 out of 50 times for an 80% success rate. But just predicting an up market would have been correct 72% of the time.
The best advice for individual investors, as Hulbert notes, is to buy and hold a diversified portfolio whether or not the stock market is up in January. If a correction or bear market would test your will to hold stocks, you should reduce your exposure now when the markets are at all-time highs, rather than waiting until the bottom of a decline as most people do.
Rebalancing your portfolio between stocks and bonds once a year or so will also help you weather eventual downturns.