Does the January effect matter for stock performance?

With US equities off to a volatile start to 2025, investors are left wondering about two well-known phenomena associated with the first month of the year: the January effect and the January barometer. Conventional wisdom suggests that January reveals what stock performance will be like for the year. Some of that may be based on equity returns for the first month historically. 

The January effect and January barometer attempt to give an explanation. But do they create investment opportunities? Probably not.

What is the January effect?

January has historically been one of the strongest months of the year for US equity returns. The trend is especially noticeable among small-cap stocks.¹ Several theories attempt to explain the phenomenon, through year-end tax-loss harvesting, seasonal liquidity, and investor psychology. Interestingly, although the January effect was seen throughout the 20th century, it has weakened substantially in recent decades.

What is the January barometer?

The January barometer refers to the fact that the S&P 500’s calendar year performance has matched the direction of January returns nearly 77% of the time.² In other words, when the index rises in January, full-year returns tend to be positive, and when the index falls in January, full-year returns tend to be negative. This has led some to believe that when it comes to stock market performance, “as goes January, so goes the year.”

The full story behind January’s historical returns

Regardless of January’s historically strong returns and supposed predictive power, investors should reconsider before making investment decisions based on market patterns. Here are three things to keep in mind about the January effect and barometer.

1. While the average return in January has tended to be higher than the average return across the remaining 11 months, it has only been the best-performing month 14 times the past 97 years in US large cap and eight times the past 46 years in US small cap.³ Clearly, it’s no guarantee that January will be the strongest month within a given year.
2. The accuracy of the January barometer is clouded by the fact that yearly stock market returns have historically been positive two-thirds of the time, and January’s predictive power has really only gone one direction.⁴ After a gain in January, full-year returns have been positive 82% of the time. However, following a loss in January, full-year returns 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. 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.