As January Goes, So Goes the Year?

The italicized tease is the title of an article I posted a year ago on the January performances in all the years with negative returns since 1871. Earlier this month, a similarly titled WSJ article provided a more elaborate study of the Dow data since 1900. Particularly interesting is an accompanying graphic comparing the Dow median gain for the year since 1900 when January is up (+10.4%) and when it's down (+0.3%).

I originally posted this item when the January S&P 500 had slumped -1.6% with two trading days left in the month. The final January close was down over double that amount at -3.7%. Should we expect 2010 to close lower? Let's examine the S&P data since 1928. The accompanying table uses a color scheme to highlight the correlation between Januarys and year-end performances. About 73% of the time there is a correlation, with 60 of the 82 Januarys matching the direction of the year. Note: I lump 1947, when the index finished flat, as a down year and hence a mismatch for the January 1947 gains.

The average index gain in years with a positive January close is 12.9%. In negative January years the index has averaged -2.8%.

There seems to be a pattern here, but the extreme outlyers make these stats more a curiosity than a "take action" indicator. Last January the index lost 6.1% but closed the year up 23.5%. Similar upside mismatches occurred in 1928 and 2003. On the other hand, check out the extreme negative annual returns in the January up years of 1929, 1930, 1931 and 1937.

Interesting stuff, but scarcely the foundation of an investment strategy.