So far, January has been a bad month for stocks. Stock markets are down across the region – down over 14% in Shanghai, 10% in Hong Kong, 6% in Singapore and almost 9% in the Philippines.
The so-called “January barometer” is the theory that the performance of a stock market in January predicts its performance for the rest of the year. The January barometer says that if a stock market rises in January, it will be up for the year… and if it’s down in January, it will be down for the year.
Of course there’s no good reason for the month of January to have any predictive power for the rest of the year. There’s no relationship between what happens the first month of the year and what happens the other 11 months.
But it works. For the S&P 500 in the U.S., the January barometer has held for all but eight of the past 65 years. That means it’s accurate an amazing 87.5% of the time.
For stock markets in Asia, the January barometer isn’t as powerful an indicator, but it’s still strong. Going back to 1990 (2000 for Vietnam), we looked at whether markets were up or down during the month of January – and then how each market ended the year. For Singapore, for example, when January ended with the stock market posting a positive return, the STI finished the year up 71% of the time. This happened for the Thai stock market only 64% of the time – and 89% of the time for Vietnam.
Encouragingly – since markets are performing poorly so far this month – the January barometer doesn’t work as well when stocks drop during the month. For example, only 55% of the time that Singaporean stocks finished January in the red, the Singapore index ended down for the year. For Indonesia, this has happened only 38% of the time.
|January is far from over. And as we wrote recently, in stock markets, the past has no bearing on the present. But in a world of wobbly markets, it’s a reassuring sign.|