By Sam Stovall via Iris.xyz

Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.

EQ: In this week’s Sector Watch, you pointed out that the S&P 500 was up nearly 8% for the month of January, placing it among the top five best-performing Januarys since World War II. A good first month historically bodes well for the market. How has the S&P 500 typically performed on the back of a strong January?

Stovall: I think many people on Wall Street were first introduced to the adage, “as goes January, so goes the year,” by The Stock Trader’s Almanac. The implication is that if you have a strong start to the year, then it would likely continue for the rest of that year. Going back to World War II, if the S&P 500 was up in the month of January, it continued to rise 83% of the time in the remaining 11 months of the year. Also, the average 11-month return was—surprisingly—11.1%.

Furthermore, if you had a down January, the market gained only 1.3% in the remaining 11 months. So, yes, January has been a pretty good indicator or early warning signal, if you will, of what could happen during the rest of the year.

EQ: At the sector level, you also laid out the groups to watch for this year’s January Barometer Portfolio. Can you refresh our readers on how the strategy works and how it’s done against the market in previous years?

Stovall: Yes, it’s a very simple strategy with the premise being, as goes January for the market, so goes the year. If we looked at the three best-performing sectors in the month of January, and then held them for the coming 12 months—not 11 months, because you want favorable tax treatment—since 1990, this strategy returned 9.0% on a compounded annual growth rate basis versus 7.5% for the S&P 500. Also encouraging is the batting average. The frequency with which this strategy beat the S&P 500 was 66%.

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