As goes January, so goes the year?

In a recent blog post, Corey Hoffstein, Chief Investment Officer and Chief Technology Officer of Newfound, looked at whether market performance in January provides any useful indication of its performance in the rest of the year.

At the end of every January there is an onslaught of articles talking about the old adage, “as goes January, so goes the year.” The translation is that the performance in January is a good indicator of how the year will turn out...

Let’s set up the basics: using S&P 500 index data going back to 1951, we can calculate that in 75% of years, the directional return – positive or negative – from the year mirrored the directional return of January...

... A strong January gives the full year’s return a solid head start, but it says nothing about performance in the following 11 months.

What’s a simple way to test this? We can look at the probability that February through December is positive given that January was positive... What is this probability? Close to 70%.

If that seems high it is because...markets, historically, have tended to go up. In fact, the raw probability that February through December was positive over the same time frame is 75%.

In other words, there is no extra information in January’s return that helps us forecast February through December. And nor would we expect there to be from any theoretical foundation.