The Investment Scientist

January Barometer Effect: What Will the Stock Market Do for the Rest of 2013?

Posted on: February 7, 2013

New York Stock Exchange

New York Stock Exchange

With the market up about 5% in January, a prospective client of mine called to let me know he is not going to invest in stocks at this time – in fact, he is going to pull all of his money out of the market.

This may not be the best course of action for him.

According to research done by Cooper and McConnell, what the market does in January has a strong predictive power for what the market will do for the rest of the year.

Using data since 1940, they found that if the market is up in January, it will rise an additional 14.8% for the rest of the year; if the market is down in January, it will rise only 2.92% for the rest of the year. This gives rise to a spread of almost 12%, a highly statistically significant number.

According to Sam Stovall, chief equity strategist at S&P Capital IQ, the S&P 500 since 1945 has risen 56% of the time following a down January. That is lower than the 84% frequency of February-through-December gains following a higher market in January,

More than a few economists have pulled their hair out trying to explain why the market behaves this way; they have yet to come up with a convincing theory.

What can you make of this?

1. Either there is something to this effect – the fact economists can not explain it does not mean we should not take advantage of it; or
2. There is nothing there, and it is pure coincidence that there appears to be a correlation. There is a statistically term for this situation – spurious correlation.

The most important thing

Regardless of what you believe about this data, the most important thing is to keep a balanced portfolio.

For my personal portfolio, I am increasing my equity allocation from 65% to 70% in recognition of the fact that there might be something there. I definitely would not increase my equity allocation to 100% or to 0%.

What would you do?

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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