First off, we’ve heard some misconceptions out there about how to calculate these indicators and how to calculate market performance in general and our January Indicator Trifecta readings specifically. To clarify, daily, weekly, monthly, and annual performance as well as our indicator readings are not calculated from the open to the close. They are calculated from close to close. This is standard operating procedure for all performance numbers throughout the industry.
Perhaps not in the day trading or crypto circles, but when you talk about an index’s percent change, gain or loss, it's from the close on one day to the close on the other day. Not after-hours trading, not pre-market trading, not the open to the close, it is the close to the close. For example, the S&P 500 index's performance for 2023, is calculated from the close on the last trading day of December 2022, the official stock exchange market close to the close on the trading day of December 2023: i.e. from the 3839.50 close on 12/30/2022 to the 4769.83 close on 12/29/2023, S&P 500 was up 24.2% for 2023.
For the calculation for the First Five Days (FFD) Indicator, you take the close and the last trading before the first trading day of the year to the close on the fifth trading day of the year: from the 4769.83 close on 12/29/2023 to the 4763.54 close on 1/8/2023 S&P 500 was down -0.1% so the FFD was down. Using indicators like our January Trifecta is a bit of an art. Readings are not binary. It’s not one-dimensional where it triggers a buy or sell like MACD does with our Best Months Tactical Switching Strategies. It does not signal a bull or bear market has ended or begun. It’s a warning to use other analyses, wits and experience to adjust our outlook and portfolio positions if needed.
Why is the Trifecta so important? With 2023 in the books and the Trifecta scoring another win, since 1950, when all three January Indicators, Santa Claus Rally, First Five Days and the full-month January Barometer (JB) are up, S&P 500 is up 90.6% of the time 29 out of 32 years for an average gain of 17.7%. When one or more of the Trifecta are down the year is up only 59.5% of the time, 25 of 42, for a paltry average gain of 2.9%. 2022 was a perfect example. We did come into the year with a cautious outlook as it was a midterm year where many bear markets occur and bottom. The Santa Claus Rally was positive in January 2022, but FFD and JB were negative and we
called the bear in February 2022 and the
bottom in October 2022.
JB Holds the Key
As we discuss in our January 8 issue, even though the SCR and FFD were negative, a positive January Barometer could salvage the Trifecta and boost prospects for full-year 2024. Following the previous three occurrences when the SCR and FFD were negative and the January Barometer was positive, S&P 500 advanced three times over the remaining eleven months and the full year with average gains of 15.1% and 19.9% respectively. The December Low Indicator (2024 STA, page 36) should also be watched with the line in the sand at the Dow’s December Closing Low of 36054.43 on 12/6/2023.
At this juncture we remain bullish, and our base case scenario outlined in our
2024 Annual Forecast is still in play. In our forecast, we noted election years are not as strong as pre-election years and we did not expect a repeat of the gains enjoyed in 2023, when the January Trifecta went 3 for 3. There is a sitting president running for re-election which has historically been bullish for the market, the JB could still be positive, and Dow’s December Closing Low has not been breached.
The History of the January Barometer
Devised by Yale Hirsch in 1972, the January Barometer (JB) has registered 12 major errors since 1950 for an 83.8% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year. Of the twelve major errors Vietnam affected 1966 and 1968. 1982 saw the start of a major bull market in August. Two January rate cuts and 9/11 affected 2001. In January 2003, the market was held down by the anticipation of military action in Iraq. The second worst bear market since 1900 ended in March of 2009 and Federal Reserve intervention influenced 2010 and 2014. In 2016, DJIA slipped into an official Ned Davis bear market in January. 2018 was the tenth major error overall as a hawkish Fed, a trade war and slowing global growth concerns resulted in the worst fourth quarter performance by S&P 500 since 2008. Covid-19 impacted 2020 & 2021. Of the 12 major errors, nine have occurred since 2001. Including the eight flat years yields a .730 batting average.
January is host to many important events, indicators, and recurring market patterns. U.S. Presidents are inaugurated and have historically presented State of the Union Addresses in January. New Congresses convene. Financial analysts release annual forecasts. We return to work and school collectively after holiday celebrations. On January’s second trading day, the results of the official Santa Claus Rally are known and on the fifth trading day the First Five Days “Early Warning” system sounds off, but it is the whole-month gain or loss of the S&P 500 that triggers our January Barometer.
And yet for some reason, every February or sooner, if January starts off poorly, our January Barometer gets raked over the coals. It never ceases to amaze us how our intelligent and insightful colleagues, that we have the utmost professional respect for and many of whom we consider friends, completely and utterly miss the point and relentlessly argue the shortcomings of our January Barometer. Again, this year we are not waiting until this happens. Instead, here is why the January Barometer is still highly relevant and why it should not be quickly dismissed.
1933 “Lame Duck” Amendment—Why JB Works
Many detractors refuse to accept the fact the January Barometer exists for one reason and for one reason only: the Twentieth “Lame Duck” Amendment to the Constitution. Passage of the Twentieth Amendment in 1933 created the January Barometer. Since then, it has essentially been “As January goes, so goes the year.” January’s direction has correctly forecasted the major trend for the market in many of the subsequent years.
Prior to 1934, newly elected Senators and Representatives did not take office until December of the following year, 13 months later (except when new Presidents were inaugurated). Defeated Congressmen stayed in Congress for all of the following session. They were known as “lame ducks.”
Since 1934, Congress convenes in the first week of January and includes those members newly elected the previous November. Inauguration Day was also moved up from March 4 to January 20.
January’s prognostic power is attributed to the host of important events transpiring during the month: new Congresses convene; the President typically gives the State of the Union message, presents an annual budget and sets national goals and priorities.
These events clearly affect our economy and Wall Street and much of the world. Add to that January’s increased cash inflows, portfolio adjustments and market strategizing and it becomes apparent how prophetic January can be. Switch all of these events to any other month and chances are the January Barometer would become a memory.
JB vs. All
Over the years there has been much debate regarding the efficacy of our January Barometer. Skeptics never relent and we don’t rest on our laurels. Disbelievers in the January Barometer continue to point to the fact that we include January’s S&P 500 change in the full-year results and that detracts from the January Barometer’s predicative power for the rest of the year. Others attempt to discredit the January Barometer by going further back in time: to 1925 or 1897 or some other random year.
After the Lame Duck Amendment was ratified in 1934 it took a few years for the Democrat’s heavy congressional margins to even out and for the impact of this tectonic governing shift to take effect. In 1935, 1936 and 1937, the Democrats already had the most lopsided Congressional margins in history, so when these Congresses convened it was anticlimactic. Hence our January Barometer starts in 1938.
In light of all this debate and skepticism we have compared the January Barometer results along with the full year results, the following eleven months results, and the subsequent twelve months results to all other “Monthly Barometers” using the Dow Jones Industrials, the S&P 500 and the NASDAQ Composite.
Here’s what we found going back to 1938. There were only 13 major errors. In addition to the 12 major errors detailed above: in 1946 the market dropped sharply after the Employment Act was passed by Congress, overriding Truman’s veto, and Congress authorized $12 billion for the Marshall Plan.
Using these 13 major errors, the accuracy ratio is 84.9% for the full 86-year period. Including the 9 flat year errors (less than +/– 5%) the ratio is 74.4% — still effective. For the benefit of the skeptics, the accuracy ratio calculated on the performance of the following 11 months is still solid. Including all errors — major and flat years — the ratio is still a decent 67.4%.
Now for the even better news: In the 52 up Januarys there were only 4 major errors for a 92.3% accuracy ratio. These years went on to post 16.2% average full-year gains and 11.6% February-to-December gains.
Let’s compare the January Barometer to all other “Monthly Barometers.” For the accompanying table we went back to 1938 for the S&P 500 and DJIA — the year in which the January Barometer came to life — and back to 1971 for NASDAQ when that index took its current form.
The accuracy ratios listed are based on whether or not the given month’s move — up or down — was followed by a move in the same direction for the whole period. For example, in the 86 years of data for the S&P 500 for the January Barometer, 64 years moved in the same direction for 74.4% accuracy.
The Calendar Year ratio is based on the month’s percent change and the whole year’s percent change: i.e., we compare December 2022’s percent change to the change for full-year 2022. By contrast the 11-month ratio compares the month’s move to the move of the following eleven months. February’s change is compared to the change from March to January. The 12-month change compares the month’s change to the following twelve months. February’s change is compared to the change from March to the next February.
Though the January Barometer is based on the S&P 500 we thought it would clear the air to look at the other two major averages as well. You can see for yourself in the table that no other month comes close to January in forecasting prowess over the longer term.
There are a few interesting anomalies to point out though. On a calendar year basis DJIA in January is slightly better than the S&P. 2011 is a perfect example of how the DJIA just edges out for the year while the S&P does not. For NASDAQ April, September and November stick out as well on a calendar year basis, but these months are well into the year, and the point is to know how the year might pan out following January, not April, September or November. Plus, no other month has a stronger basis for being a barometer. January is loaded with reasons.
Being the first month of the year it is the time when people readjust their portfolios, rethink their outlook for the coming year and try to make a fresh start. There is also an increase in cash that flows into the market in January, making market direction even more important. Then there is all the information Wall Street has to digest: The State of the Union Address in most years, FOMC meetings, 4th quarter GDP data, earnings, and a plethora of other economic data.
Myths Dispelled
In recent years new myths and/or areas of confusion have come to light. One of the biggest errors is the notion that our January Barometer is a stand-alone indicator that could be used to base all your investment decisions for the coming year on. This is simply not true, and we have never claimed that our January Barometer should or could be used in this manner. Our January Barometer is intended to be used in conjunction with all available data deemed relevant to either confirm or call into question your assessment of the market. No single indicator is 100% accurate so no single indicator should ever be considered in a vacuum. Our January Barometer is not an exception to this.
Another myth is that the January Barometer is completely useless. Those that believe this like to point out that simply expecting the market to be higher by the end of the year is just as accurate as the January Barometer. Statistically, they are just about right. In the 86-year history examined in this article, there were 25 full-year declines. So yes, the S&P 500 has posted annual gains 70.9% of the time since 1938. What is missing from this argument is the fact that when January was positive, the full year was positive 86.5% of the time and when January was down the year was up 44.1% of the time. These are not the outcomes that pure statisticians prefer, but once again, our January Barometer was not intended to be used in a vacuum.