Money Management: What the ‘January Barometer’ means to the markets

By Dana R. Consler
Posted: 5:46 pm Tue, January 24, 2012

This time every year the financial media reminds us of the old stock market saying: “As goes the first week of the New Year, so goes the month and so goes the year.” This is the so-called “January Barometer,” devised by Yale Hirsh in 1972, and it has a pretty darn good track record.

The indicator has registered a mere seven errors since 1950 for an 88.5 percent accuracy ratio. The Hirsh organization also notes that the last 38 First Five Days of the New Year were followed by full-year gains 33 times for an 86.8 percent accuracy ratio and a 13.9 percent average gain in all 38 years. Ominously, every negative month of January for the index since 1950, without exception, preceded a new or extended bear market, a flat market or a 10 percent correction.

Historically, the stock market has a bullish bent 67 percent of the time. This year’s start is evidence of the January Barometer in the early going since the S & P 500 index was up in the first five days of the year.

What could be helping to produce this strong start to many years? Cash flows into the market, for one thing. Year-end bonuses paid in January and 401(k) contributions provide the market with cash that needs to be invested.

Another influence could be a variant of the January Barometer called the “January Effect”. This is the tendency of small cap stocks to outperform large stocks in January that often is most pronounced in the first half of the month. This effect is explained by individual investors who disproportionately own smaller company stocks and sell them in December to establish tax losses. They then buy back these stocks in January driving prices higher. 

Another well-known Wall Street player, Lucien Hooper, came up with the “December Low Indicator” back in the 1970s. He said to watch the lowest price for the Dow Jones 30 Industrials in December. If that index goes below that level during the first quarter of the New Year, watch out!

As it turns out, in all but two instances since 1952 when the December low was breached during the first quarter the Dow fell another 11 percent on average. Also, if the December low is not violated in the next quarter, heed the January Barometer. Taken together with the December Low it has proved correct nearly 100 percent of the time. (Thanks to Jeff Saut at Raymond James for the December Low overview.)

What will be in store this year for the stock market? First of all, it’s a presidential election year. These fourth years of the election cycle have been good to investors. Since WWII the market has risen in 11 of 15 such years by an average of 11.1 percent per year. Presidents tend to try to pull out all the stops to stimulate the economy in their last two years in office in order to win re-election.

Traditional stock valuation metrics say large cap stocks in particular are undervalued and attractive compared to long term norms. Strong balance sheets, rising dividends and very low bond yields could lead to more enthusiasm for high quality stocks. Some resolution to the European debt crisis, perhaps our politicians being less dysfunctional than in 2011 and modest expansion of stock multiples should produce reasonable returns in the range of 5 percent to 8 percent for stocks in 2012.

Dana Consler is executive vice president of Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, unions, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680 or email dana@karpus.com.