When January Speaks, Does the Bond Market Listen?

[WITH CODE] Exploring another seasonal anomaly in the U.S. equities market

Hello and welcome back to another paid post!

Today we will take a look at the January Barometer and whether that seasonal signal becomes meaningfully stronger when paired with a macroeconomic lens.

Let’s dive right in.

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January Barometer

Imagine being handed a single data point on January 31st each year: the stock market’s return for that month. Would you use it to make a decision about how to invest for the next eleven months? It sounds almost too simple. And yet, that is precisely the premise of one of the most discussed calendar based market signals in finance: the January Barometer.

The January Barometer, popularized by Yale Hirsch in his Stock Trader’s Almanac (1972) says that when January’s equity return is positive, the stock market tends to finish the year with strong gains through December. When January is negative, the next eleven months are, on average, considerably weaker. The Journal of Investment Management demonstrates that the optimal implementation is straightforward. You hold equities in years following positive Januarys and retreat to Treasury bills following negative ones. This strict rule prevents any look-ahead bias as the signal at the end of month t determines the position for month t + 1. It is a blunt instrument, but it is one that the data has been reluctant to dismiss.

This post is motivated by a natural follow up question: if one signal drawn from investor sentiment can predict the rest of the year to some extent, does adding a second signal sharpen that prediction? The signal we have in mind is the slope of the U.S. Treasury yield curve (the spread between long term and short term Treasury yields). If the yield curve is telling us something about the economic environment that the January Barometer cannot, then combining the two might produce a richer and more reliable composite signal.

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