Daily Bulletin


The Conversation

  • Written by The Conversation Contributor

So far, it has not been a happy new year for equity market investors. The Australian equity market lost A$100 billion in market value in the first week of trading, mirroring a dire global trend.

If we are are to believe the “January barometer”, things may be about to get worse. The January barometer is based on the belief that when the equity market ends in the black for the month of January, the subsequent year will be prosperous for equity markets, while a negative equity market return in January signals a bearish year for stocks.

The barometer was first devised in 1972 by the editor of the Stock Trader’s Almanac, Yale Hirsch. Hirsch claimed that January returns could accurately predict subsequent equity market returns in 91.1% of years, with the rare failures of this indicator being explained by extreme events such as wars.

If the January barometer were as accurate as has been suggested then this indicator would provide a boon to investors who could use the signal to make asset allocation decisions for the subsequent year. Unfortunately financial markets are like discount airlines; there are no free lunches. Competitive market forces result in investors exploiting, and therefore eliminating, any opportunities to make risk-free abnormal profits.

The weight of academic evidence now shows that the evidence used to justify the January barometer was a statistical anomaly. The result does not appear to hold when a longer sample of years are analysed and there does not appear to be any evidence to support the January barometer outside of the US.

An examination of returns on the Australian equity market from 1974 to the present provides a further rebuttal to January barometer. The figure below provides annual average returns across the subsequent eleven months for years in which the return in January is positive and negative respectively.

image Data used to create this chart was sourced from Datastream.

As shown in this figure, the average equity market return in years following a negative January return (5.8%) is actually marginally higher than average returns in years following positive January returns (5.6%).

Recent history is also informative. In 2014 investors had a similarly unhappy start to the year, yet the market subsequently rebounded and ended the year in the black. Last year the market was up 3.2% in January, yet fell by 6.5% over the subsequent eleven months.

It is therefore clear that January returns are not a magic bullet that can be used to forecast stock market performance and make investment decisions. Financial markets are too sophisticated for individual monthly returns to be informative about the future. To borrow a quote from Mark Twain:

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

Given the January barometer does not have merit as a forecasting tool, many investors will be anxious to know what lies ahead. Recent stock market declines can be attributed to structural problems across global economies. Chinese growth is continuing to weaken and global debt has increased significantly following a sustained period of low interest rates.

Ongoing global security threats were also identified as a potential limit to economic growth at the G20 summit last year. While predicting the direction of stock market returns across 2016 is fraught with danger, the current uncertainty across global markets appears to indicate that whatever the end result, investors are likely to be in for a volatile ride.

Authors: The Conversation Contributor

Read more http://theconversation.com/is-the-january-barometer-providing-an-early-warning-for-2016-equity-returns-52893

Writers Wanted

The big barriers to global vaccination: patent rights, national self-interest and the wealth gap

arrow_forward

After riots, Donald Trump leaves office with under 40% approval

arrow_forward

Five ways Australians can save the planet without lifting a finger (well, almost!)

arrow_forward

The Conversation
INTERWEBS DIGITAL AGENCY

Politics

Ray Hadley's interview with Scott Morrison

RAY HADLEY: Prime Minister, good morning.    PRIME MINISTER: G’day Ray.   HADLEY: I was just referring to this story from the Courier Mail, which you’ve probably caught up with today about t...

Ray Hadley & Scott Morrison - avatar Ray Hadley & Scott Morrison

Prime Minister's Remarks to Joint Party Room

PRIME MINISTER: Well, it is great to be back in the party room, the joint party room. It’s great to have everybody back here. It’s great to officially welcome Garth who joins us. Welcome, Garth...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Ben Fordham, 2GB

BEN FORDHAM: Scott Morrison, good morning to you.    PRIME MINISTER: Good morning, Ben. How are you?    FORDHAM: Good. How many days have you got to go?   PRIME MINISTER: I've got another we...

Scott Morrison - avatar Scott Morrison

Business News

7 foolproof tips for bidding successfully at a property auction

Auctions can be beneficial for prospective buyers, as they are transparent and fair. If you reach the limit you are willing to pay, you can simply walk away. Another benefit of an auction is tha...

Dominique Grubisa - avatar Dominique Grubisa

Getting Ready to Code? These Popular and Easy Programming Languages Can Get You Started

According to HOLP (History Encyclopedia of Programing Languages), there are more than 8,000 programming languages, some dating as far back as the 18th century. Although there might be as many pr...

News Co - avatar News Co

Avoid These Mistakes When Changing up Your Executive Career

Switching up industries is a valid move at any stage in your career, even if you’re an executive. Doing so at this stage can be a lot more intimidating, however, and it can be quite difficult know...

News Co - avatar News Co



News Co Media Group

Content & Technology Connecting Global Audiences

More Information - Less Opinion