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The rally in U.S. stocks slowed last month as the S&P 500 Index ended January up a modest 1.6%, following a whopping 8.9% gain this past November and 4.4% gain in December.1 With U.S. equities off to a more tempered start in 2024, discerning investors are left to wonder about two well-known phenomena regarding the first month of the year: the “January effect” and the “January barometer.”
What have equity returns the first month of the year historically looked like? Is stock performance in January indicative of what performance will be for the full year? The January effect and January barometer shed light on these questions. But do they create investment opportunities? Probably not.
On average, U.S. equity returns have tended to be strongest in January, compared with the other 11 months. The trend has been especially prevalent among small-cap stocks.2 Several theories attempt to explain why, including the impact of year-end tax loss harvesting, the flow of funds in the new year, and investor psychology. Interestingly, although the January effect was seen throughout the 20th century, it has weakened substantially in recent decades.
The January barometer refers to the fact that the S&P 500’s calendar-year performance has matched the direction of January returns nearly 77% of the time.3 In other words, when the index rises in January, full-year returns tend to be positive, and when the index falls in January, full-year returns tend to be negative. This has led some to believe that when it comes to stock market performance, “as goes January, so goes the year.”
Regardless of January’s historically strong returns and supposed predictive power, investors should reconsider before making investment decisions based on market patterns. Here are three things to keep in mind about the January effect and barometer.
1. While the average return in January has tended to be higher than the average return across the remaining 11 months, January was only the best-performing month 14 times in the past 96 years in U.S. large cap, and eight times the past 45 years in U.S. small cap.4 This means the January effect is only visible in the magnitude of returns in January compared with the other months of the year, not the frequency in which January outperforms them.
2. The accuracy of the January barometer is clouded by the fact that yearly stock market returns have been positive two thirds of the time, and January’s “predictive power” has really only gone one direction.5 After a gain in January, full-year returns have been positive 81% of the time. However, following a loss in January, full-year returns have been negative just 54% of the time.6 This means when returns in January are negative, the January barometer is just slightly more accurate than a coin toss.
3. Exiting the market after a down January and missing a subsequent gain for the year could be detrimental to an investor’s long-run total return. Historical data show that, over time, a buy-and-hold approach would have meaningfully outperformed a strategy that times the market based simply on the direction of January returns.7
The beginning of the year is often full of anticipation. By the end of the year, we usually find reality was different from our expectations. As in life, investors should not lose sight of the long term, regardless of what January brings.
Brian Levitt is Global Market Strategist at Invesco and cohost of Invesco’s “Market Conversations” podcast. James Anania, Investment Strategist at Invesco, contributed to this article.
Notes
1. Bloomberg, 1/31/24. Based on monthly S&P 500 Price Index data from 10/31/23 to 1/31/24.
2. Bloomberg, 12/31/23. Based on monthly S&P 500 Price Index (1928 to 2024) and Russell 2000 Price Index (1979 to 2024) data since inception.
3. Bloomberg, 12/31/23. Based on monthly S&P 500 Price Index data from 1928 to 2024.
4. Bloomberg, 12/31/23. Based on monthly S&P 500 Price Index (1928 to 2024) and Russell 2000 Price Index (1979 to 2024) data since inception.
5. Bloomberg, 12/31/23. Based on yearly S&P 500 Price Index data from 1928 to 2024.
6. Bloomberg, 12/31/23. Based on monthly S&P 500 Price Index data from 1928 to 2024.
7. Bloomberg, 12/31/23. Based on monthly S&P 500 Total Return Index (1989 to 2024) data since inception.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of Feb. 6, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
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