The rally in US 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 US 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.
What is the January effect?
On average, US equity returns have tended to be strongest in January, compared to 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.
Since 2000, January’s tendency to be the best-performing month has faded
What is the January barometer?
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.”
The full story behind January’s historical returns
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.
A buy-and-hold approach would have outperformed a strategy based on the January barometer
Don’t lose sight of the long-term
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.
Important information
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Past performance is not a guarantee of future results.
Invesco Distributors, Inc.
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Investors should consult a financial professional before making any investment decisions. 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 does not guarantee future results.
Investments cannot be made directly in an index.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The Russell 2000® Index, a trademark/service mark of the Frank Russell Co.®, is an unmanaged index considered representative of small-cap stocks.
Price indexes only measure the price movements of the securities in an index. They do not include dividends, interest, or other distributions.
Tax-loss harvesting refers to selling an investment at a loss to offset taxes from a capital gain.
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. 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.
