Is the so-called “January barometer” accurate?
This year we should all hope it is!
Developed in 1972 by Yale Hirsch – founder of the Stock Trader’s Almanac – the January barometer is a simple premise based on more than a half-century of market data: As the S&P 500 Index goes in January, so goes the year.
Since 1950, this unique indicator has had only 12 major errors – that is, years when the S&P’s performance in January was significantly different from its performance for the entire year. That gives this indicator an impressive accuracy ratio of about 84%.
What went wrong in the years when stocks rose in January but fell for the entire year? It was often a major global calamity: the Vietnam War in 1966 and 1968; anticipation of military action in Iraq in 2003; the COVID-19 pandemic in 2020 and 2021…
So what’s the major worry this year?
It is an oil shock caused by escalating conflicts in the Middle East. Conflicts in the region have already pushed the price of Brent crude up $5 this year, to about $80.
But putting such unpredictable events aside, things are looking pretty good so far this January. The S&P 500 set a new all-time high on Friday, surpassing the previous high set back in January 2022. And it hit another high on Monday. It’s currently up 2.6% for the year.
That certainly bodes well for the rest of 2024.
The Almanac doesn’t get into the reasons why January has been such a good barometer for the entire year for the last seven decades. Perhaps the first month sets the tone for the year among investors and gets their animal spirits, well, animated.
In investing, it’s never a good idea to take an indicator like this on faith.
Yet this year the January barometer seems to be pointing in the right direction – there are strong tailwinds for the economy and the stock market that could carry January’s gains through the end of the year.
While there is still a good deal of uncertainty regarding the path for both inflation and interest rates this year, other factors look very positive indeed.
Retail sales rose strongly in December, signaling that Americans are confident in the economy (despite what polls say).
And GDP grew at a 2.4% pace in the fourth quarter, the Atlanta Federal Reserve estimates. That’s up from the previous estimate of 2.2%.
Plus, jobless claims plunged last week – reaching their lowest level in a year – which indicates the labor market remains solid.
And mortgage rates, which are so important to the housing industry – which makes up almost 20% of the economy – have fallen to their lowest level since May, according to Freddie Mac.
Not to mention, the average 30-year fixed-rate loan dropped to 6.6% last week. (Recall that mortgage rates rose almost to 7.8% in October, which put the brakes on homebuying across the nation.)
But most important of all for stocks will be earnings.
According to FactSet, which tracks earnings, analysts expect S&P 500 earnings per share to grow 10% year over year to $244 in 2024 and another 12% to $275 in 2025.
That’s solid earnings growth.
As Alexander Green always says, stock prices eventually and without fail follow earnings. And earnings are the best long-term indicator of stock prices.
While the market in 2023 had its ups and downs – dropping 10% from August 1 through October 1 – the S&P 500 finished the year up 24%. The Nasdaq did even better, racking up a 43% gain for the year.
Those are phenomenal returns for one year.
And if the January barometer is right, 2024 could be another good one.