The January barometer may have to wait a year

Nobody really pretends that investment advice doled out on this basis has universal application, with the obvious exception of ‘buy low, sell high’. But it can remind us that successful investment strategies are often predicated on first principles; simple foundational propositions or assumptions. Put another way, it is possible to overcomplicate matters.

As goes January, so goes the year. Pithy enough, but does it bear scrutiny? The general idea is that if a market closes-out January trading in advance of where it was at the end of the prior year, we should be in for a good year. The flip-side is that if a market slides through the month, then prospects are bleak for the remainder of the year.

Unfortunately, as I write, midway through proceedings on the last trading session of January, the FTSE 100 is on a razor’s edge, teetering at 0.8 per cent adrift of the closing value of 2020.  

Yet even if we were blessed with a definitive measure, we still need to view the proposition from an historical perspective. So, in the 36 years the index has been in existence, the maxim has held true 66 per cent of the time. Although the sample size could not be deemed statistically significant, when it is viewed in conjunction with data covering the S&P 500 index, a strong positive correlation can be observed. Indeed, analysis from CFRA Research points to a rate above 80 per cent for US indices in the post-war period – that is hard to ignore.

It is also worth noting that in three-quarters of the years in which the January relationship did not apply to the FTSE 100, a negative showing at the end of the month morphed into a positive result by the year-end, perhaps raising another well-worn aphorism: it’s always a bull market in the long run.

It is not surprising that the UK market is at slack tide, neither ebbing or flowing. So, the January dynamic may have to wait a year. We are, if it needs to be said, living through interesting times. And many of the general assumptions on the way that markets operate have been put to the test following on from a global banking crisis, quantitative easing and now Covid-19 (Brexit seems like a bit of a sideshow by comparison). Even the historical relationship between gilts and equities seems to be on shaky ground nowadays, so it is understandable why investors might view the barometer as little more than an oddity, but the numbers do make for interesting reading.