Debunking January’s Predictive Power

January“As January goes, so goes the year” is an often-quoted stock market aphorism suggesting that how stocks do in the first month of the year can predict how the following 11 months turn out. Last year, for example, the S&P 500 index rose more than 7% in January on its way to gains of more than 30% for the entire year. But how often does that relationship hold true?

The Economist’s Stanley Pignal crunched the numbers to answer that question. He found that stocks do indeed tend to do better over the course of the entire year when they rise in January, which makes sense since the returns from January are part of the returns for the entire year. But when the January performance was excluded from the full-year numbers to see how stocks do only in the last 11 months of the year, there’s almost no relationship between the two numbers.

In other words, January doesn’t seem to have the claimed predictive power of lore. Perhaps that’s some comfort to investors who suffered from last month’s stock market declines.

Topics: Blog