In my previous article, I explored the January effect and whether the STI tends to rise in the first month of the year. From my data, it seems that is indeed the case. The STI climbed higher in January for 15 out of the last 26 years. In this article, we’re going to explore the January barometer and whether it holds true for the STI.
The January barometer is a hypothesis that if the stock market rises in January, it is likely to continue rising for the rest of the year. Similarly, if the market falls in January, it is likely to close lower for the year. Sounds like hocus pocus but is it true for the STI? Furthermore, I also wanted to find out what your average returns would be if you invested in the STI for the entire year only in the years the market rose in January. Would the January barometer give you higher returns?
We already know which years the STI rose or fell in January from my previous research. For this study, I also calculated the STI’s open price on the first trading day in January to the open price on the first trading in January the following year to obtain the percentage change for the entire year.
So let’s have a look at the results:
Year Jan Open Feb Open Jan % Change 12-Month % Change
1990 1449.5 1528.8 5.47 -20.42
1991 1153.5 1267.7 9.90 28.25
1992 1479.4 1526 3.15 3.02
1993 1524.1 1620.4 6.32 59.27
1994 2427.4 2338.7 -3.65
-3.62
1995 2339.6 2083.4 -10.95 -3.12
1996 2266.5 2451.9 8.18 -2.19
1997 2216.8 2214.9 -0.09 -30.97
1998 1530.2 1264.7 -17.35 -12.46
1999 1339.57 1427.35 6.55 86.80
2000 2502.28 2241.78 -10.41 -23.16
2001 1922.81 1984.43 3.20 -15.63
2002 1622.31 1804.96 11.26 -17.52
2003 1338.02 1299.79 -2.86 -32.19
2004 1768.78 1835.12 3.75 16.76
2005 2065.15 2097.66 1.57 14.02
2006 2354.59 2425.67 3.02 28.08
2007 3015.74 3151.27 4.49 14.82
2008 3462.69 3015.9 -12.90 -49.13
2009 1761.56 1746.47 -0.86 64.49
2010 2897.62 2745.35 -5.26 10.09
2011 3190.04 3179.72 -0.32 -17.04
2012 2646.35 2906.69 9.84 20.49
2013 3188.59 3286.65 3.08 -0.28
2014 3179.67 3011.41 -5.29 5.80
2015 3364.08 3398.51 1.02 -14.12
2016 2889.23 - - -
From 1990 to 2015, the January barometer has proven correct for 16 out of 26 years – an accuracy rate of 62%. Even better, the January barometer was correct for nine out of ten years from 1991 to 2000! Since then, its hit rate has dropped quite a fair bit; only seven out of 16 years thereafter – a 44% accuracy.
But here’s the interesting bit – the average STI annual return from 1990 to 2015 is 6.71%. But if you invested in the STI for the whole year only in the years January posted a positive month (the barometer), your average annual return from the STI would be 13.42% — double the normal return.
So what does this mean for investors? If you’re the sort that likes to time your entries, the January barometer might definitely interest you and the data suggests that using it will give you higher than average returns. Of course, past performance is not indicative of future results and you also have to remember that just because market returns are positive on average, it is no guarantee that the market will rise higher this year (or the next. Who knows?).
So if you’re the sort that can’t be bothered and prefer a fuss-free way of investing in the STI, then sticking to a monthly dollar-cost averaging strategy might work better for you!
Read more: The January Effect: Does the STI Always Rise in January?
