Should You Put Faith in the January Barometer?

The New York Times reports on the so-called “January barometer” posited by Yale Hirsch’s Stock Trader’s Almanac, first published in 1968, and which his son, Jeff Hirsch, has recently called attention to. The idea is “as January goes, so goes the entire market year.” Jeff Hirsch maintains that the January barometer has been accurate 75% of years since 1950. He explains the purported phenomenon as follows”. Traders and analysts react to the political agenda, as well as what the new year looks like based on last year and the state of the world economy,” continuing, “I think that’s the root of it.”

There are important reasons to doubt whether the January barometer is, in fact, predictive of the year. The stock market posted gains in approximately 70% of the last 30 years, so simply predicting that the market would rise every year would be nearly as accurate as the 75% that Jeff Hirsch found for the January barometer. Further, over the last 10 years, the January barometer has been as accurate as one would expect from flipping a coin: it gave four false negatives and one false positive for an accuracy rate of 50%.

Professor Rebecca Goldin of George Mason University says, “Our brains are hard wired to find causality,” continuing: “That’s especially true for the stock market. The stock market may not be entirely random, but there’s enough about it that is to make it unpredictable. The desire to find a pattern is really strong because if you’re right, it could make you rich.” While the New York Times notes that some mathematicians and quantitative analysts may have found relevant and useful patterns, they aren’t reducible to pithy concepts and catch phrases.

“There’s a reason people love almanacs,” says Professor Nassim Nicholas Taleb of New York University: “They purport to find order in random events.” He notes that “if you have a truly random variable, and there are, say, 60 million possibilities, it’s impossible not to find some pattern somewhere.” He continues: “You might well find a correlation between changes in your grandmother’s blood pressure and stock prices.” Nonetheless, Professor Taleb opines, “one thing you learn as a trader is, don’t bet against the folk wisdom,” noting, “the odds are this is a purely random outcome, but sometimes there’s a kernel of truth in these sayings.”