Treat the January Barometer critically

Rather than placing a lot of emphasis on this single indicator, you’ll be better off putting the time into developing a long-term investment plan that meets your needs and goals.

A recurring pattern that has been used to predict the stock market’s performance in the past is the so-called ‘January Barometer’. While such patterns may serve as useful indicators, they’re no substitute for a sound long-term investment plan.

Simply put, the January Barometer is a phenomenon which gives an indication of what may occur during the next 11 months. The maxim holds that ‘as January goes, so goes the year’. That is, if markets are up in January, you would expect them to rise for the remainder of the year. If markets decline, however, you would expect the opposite. [See our description of the January Barometer in the Glossary section under the Daily Adviser tab of the Advice for Investors web site: https://www.adviceforinvestors.com/glossary/#top.]

Since 1950, the January Barometer has had a good record at predicting the course of the S&P 500 (the Standard & Poor’s 500-stock index). During this time period, whenever the S&P 500 moved up or down in January, the index did likewise for the balance of the year, most of the time.

The indicator is negative for 2021

In January 2021, the S&P 500 declined by 1.11 per cent. The indicator suggests that stock prices in 2021 will end up lower than at the end of 2020. When it comes to the Toronto Stock Exchange, the January Barometer has had less success in predicting the market’s trend.

Regardless of what the January Barometer says, it’s best not to let such indicators dictate your investment strategy. After all, stock markets are unpredictable, at least in the short run.

The COVID-19 pandemic, for instance, knocked down stock markets in February and March, 2020. Later on stock prices recovered thanks to historically low interest rates, large fiscal stimulus spending and the rapid development of vaccines. Now the emergence of virulent new strains of COVID-19 have reduced investor confidence. Is COVID like the flu which requires a new shot each year? Will lockdowns and shutdowns damage the economy for far longer than originally thought? And why is Canada unable to receive enough supplies of the vaccine?

Keep calm and carry on

There are other uncertainties that can hurt the markets: big government deficits; how to respond to the Chinese Communist Party; the impact of Brexit; protests in Russia; among others. Then again, the stock market is well known to ‘climb a wall of worries’.

Remember, too, that the January Barometer may merely reflect what’s known as ‘data mining’. That is, if you look for recurring patterns hard enough, you’ll find them even if they have no validity.

The January Barometer is down. But whatever 2021 brings, you should not base your investment strategies on ideas such as the January Barometer. Instead, devise a sound investment plan. Such a plan should consist of keeping a balanced and diversified portfolio, buying gradually and mostly sticking with high-quality stocks. These measures should help reduce your risk and raise your profits over time.

This is an edited version of an article that was originally published for subscribers in the February 12, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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