January barometer

Does the weak start to the year portend a down year for the market in 2008? The so-called “January Barometer,” which posits that as January goes, so goes the year, would suggest that it does.

First recognized by Yale Hirsch in 1972, the January Barometer appears to be an especially good predictor when the market is up in January. In the 58 years since 1950, the S&P 500 has been up in January 37 times. Of those years, the S&P has been up for the year 34 times, or more than 90% of the time.

On the downside, the correlation is not as strong, but the market direction in January is still predictive of the direction of full-year results more often than not. In the 21 years since 1950 that the S&P 500 has been down in January, it has finished the full year down 12 times, or a little more than half the time.

When the market is very weak in January, as it was this year, the odds rise that the year itself will also be down. Following the 10 worst Januarys since 1950, the S&P 500 was down for the year seven times. Those are higher odds of a down year than we like to see.

On the other hand, in those same 10 worst Januarys, the S&P 500 was down an average of 5.5% for the month, but only down an average of 5.8% for the full year. So, most of the damage for the year was done in the first month, and from there, the market was about flat for the rest of the year.