The S&P 500 Ends January Lower—Will 2021 Follow Suit?

January was an interesting month, to say the least.

A violent group of protestors stormed the Capitol building. Two runoff elections in Georgia evened out the seats in the Senate, 50-50. Joe Biden was sworn in as the 46th President of the United States. Two more companies—Johnson & Johnson (JNJ) and Novavax (NVAX)—provided positive efficacy data for their COVID-19 vaccines. And a group of Reddit users joined forces to create a short squeeze in GameStop (GME), driving the stock 323% higher in five trading days and costing hedge funds billions.

That’s the Reader’s Digest version, with each of these major events playing a role in the stock market’s wild swings in January. The Dow experienced swings of 500 points or more five times last month, with three of those instances occurring in the final three trading days of January. Ultimately, the Dow ended the month 2.0% lower.

With the first month of 2021 in the rearview mirror, many Wall Streeters are now wondering if January’s volatility will be a precedent for the rest of the year.

Enter the age-old Wall Street adage: “As January goes, so goes the year.”

The Stock Trader’s Almanac coined this phrase after its founder Yale Hirsch uncovered the “January Barometer” back in 1972. Simply put, the theory is that the S&P 500’s performance in January is a precursor to how the market will perform the rest of the year. So, considering that the S&P 500 ended January 1.1% lower, the market is likely to end the year lower, right?

But, before we get ahead of ourselves, how much truth is there in the January Barometer?

According to The Stock Trader’s Almanac, the January Barometer has only been wrong ten times since 1950. Given that, the January Barometer has about an 85.5% accuracy ratio. Each year that the barometer was inaccurate, there were significant global events that either derailed the stock market or ignited a turnaround throughout the year. We’re talking about events like the Vietnam War, 9/11, military action in Iraq, and the Federal Reserve’s key interest rate policies and quantitative easing efforts.[1]

One of the most recent occurrences of January Barometer failure was in 2018. In January 2018, the S&P 500 rallied 5.6%, setting the stage for a strong market that year. However, the fourth quarter derailed the market; as trade tensions between the U.S. and China heated up and the Federal Reserve started raising interest rates, Wall Street grew concerned about global economic growth. As a result, the S&P 500 ended the year 7.0% lower.

Now, you may be wondering how 2020 fared in relation to the January Barometer, simply given the short-lived bear market, the raging COVID-19 pandemic, social unrest, and the global central bank's efforts to stem the economic fallout. There were indeed plenty of events to impact the stock market last year.

Interestingly, the S&P 500 dipped a slight 0.16% in January 2020. So, based on the January Barometer, the S&P 500 should have ended the year lower. Given all the unprecedented events of 2020, one would have thought that the S&P 500 should have slipped last year, too. But, as we all know, the broader indices rebounded impressively from the March lows, with the S&P 500 ultimately ending 2020 near all-time highs and up 15.5% for the year.

These recent missteps in 2018 and 2020 certainly give one pause about the January Barometer.

The reality is that while the January Barometer does have some clout, predicting the S&P 500’s performance for the year 85.5% of the time, none of us can accurately pinpoint where the market is going to end the year after January. If 2020 taught us anything, it’s that too much can happen in 11 months—and it could negatively or positively impact the market.

So, at Nicollet Investment Management, we don’t recommend making adjustments to your investment strategy because the January Barometer may be pointing to a lower stock market by yearend.

Instead, we encourage you to stay focused on the big picture and achieving your financial goals with an investment strategy that thrives in up and down markets. Give us a call today to discuss how and if your investment strategy is well-positioned for the next 11 months.

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[1] https://jeffhirsch.tumblr.com/post/181716179343/why-january-is-still-the-most-important-month