Markets and Economy Does the January effect indicate stock performance?

After a volatile 2025, investors are searching for clues for what may lie ahead in 2026. At the start of each year, two popular market theories — the January effect and the January barometer — seem to grab attention. But do either shed light on future stock performance or create investment opportunities? Or are they simply market folklore? In our view, investors should be cautious about basing decisions on these particular seasonal patterns.

What is the January effect?

The January effect is the historical tendency for US stock returns to be strongest during the first month of the year. The trend is especially noticeable among small-cap companies.¹ Several theories attempt to explain the phenomenon, with year-end tax-loss harvesting, seasonal liquidity, and investor psychology among the most common. The January effect was widely observed throughout the 20th century. But its presence has diminished significantly in recent decades, raising questions about relevance today.

What is the January barometer?

The January barometer is a stock market theory that suggests returns in January indicate the direction of returns for the full year. In other words, when the stock market rises in January, full-year returns will tend to be positive, and when the market falls in January, full-year returns will tend to be negative. Since the S&P 500 Index’s calendar year performance has historically matched the direction of January returns nearly 78% of the time, it’s led some to believe that when it comes to the stock market, “as goes January, so goes the year.“²

The full story behind January’s historical returns

Despite January’s reputation for strong returns and its supposed predictive power, investors should think twice before basing investment decisions on seasonal patterns alone. Here are three things to know about the January effect and January barometer:

1. January has rarely been the year's best-performing month

While the average return in January has tended to exceed the average return across the remaining 11 months, it has only been the best-performing month 14 times the past 98 years in US large cap and eight times the past 47 years in US small cap.³ Clearly, January is not guaranteed to be the strongest month within a given year.

2. The January barometer’s predictive power is overstated

Annual stock market returns have historically been positive 67% of the time, which suggests the January barometer’s predictive power may be more coincidence than true signal.⁴ On top of that, January’s “predictive power” has really only gone one direction. Consider that after a gain in January, full-year returns for the S&P 500 Index have been positive 82% of the time, whereas following a loss in January, S&P 500 returns for the year have been negative just 54% of the time.⁵ This means that when returns in January are negative, the January barometer has only been slightly more accurate than a coin toss.

3. Timing the market can be costly

Exiting the market after a down January and missing a subsequent gain for the year could be detrimental to an investor’s long-run total return. Historical data shows that, over time, a buy-and-hold approach would have meaningfully outperformed a strategy that times the market based simply on the direction of January returns.⁶

Don’t lose sight of the long term

The beginning of the year is often full of anticipation. By the end of the year, we usually find reality was different from our expectations. As in life, investors should not lose sight of the long term, regardless of what January brings.