The Myth of Predicting the Market Based on Early January Performance

You may come across self-proclaimed fortune-tellers who base their predictions for 2024 on how the market performs in early January. However, let's not be swayed by their claims. The truth is, the first few trading sessions of the year hold no more predictive power than any other time of the year. In fact, they tell us next to nothing.

It's important to note that there are various interpretations among those who attempt to decipher the early-January market movements. Some believe that the very first trading day of January holds some magical significance. Others shift their attention to the first two or five trading days. There are also proponents of the January Effect, who analyze the entire month.

Yet, as the table below clearly shows, none of these approaches have a remarkable track record. In fact, if you were to simply predict that the stock market will rise each year, you would have a better chance of success.

| Approach | Success Rate | | ------------------ | ------------ | | First Trading Day | Low | | First Two Days | Low | | First Five Days | Low | | Entire Month | Low |

None of the variances highlighted in the table are statistically significant at the commonly accepted 95% confidence level used by statisticians. This should not come as a surprise when considering the efficient nature of the market.

Imagine what would happen if one or more of these predictions did have a consistently successful track record. Investors would eventually catch on and attempt to take advantage of this knowledge, ultimately rendering the predictions ineffective.

In conclusion, it's crucial to approach these market predictions with skepticism. Don't be swayed by claims of early January insights. Focus on making informed decisions based on solid research and analysis, rather than speculative trends that lack substantial evidence.

The Hallmark of Market Efficiency

The hallmark of market efficiency is that the market's future direction is not based on what came prior. Regardless of how the market performs during the first trading sessions of January, stocks will gain in 2024 only if economic developments throughout the year turn out to be better than investors expect.

Market Performance and Expectations

By definition, it is almost impossible to predict whether things will turn out better or worse than expected. If we already knew that things would turn out better than expected, then the market would go up right away, rather than waiting to react. This principle is at the heart of the Wall Street wisdom to "buy the rumor, sell the news."

Outperforming Macro Hedge-Funds

This is one of the reasons why the stock market often outperforms advisers who base their strategies on macroeconomic forecasting. As highlighted in a December 2023 column, the S&P 500 (SPX) has more than doubled the annualized return of the average macro hedge-fund over both the past five-year and 10-year periods.

A Word of Caution

Keep these factors in mind in the coming days as commentators analyze and speculate about what the first few days of January mean for the rest of 2024.

More: Health of U.S. Labor Market Looms Large on Markets' Radar This Coming Week

Also read: So Much for 'the January Effect': Here Are Five Things That Could Interrupt the U.S. Stock Market Rally in Early 2024.