The start of 2025 hasn’t been great for the markets. After coming off a strong performance in 2024, when the S&P 500 (^GSPC 1.83%) rose by more than 23%, it has been going nowhere in the first few weeks of the new year. This has some investors worried that this could be the start of a disappointing year, especially with many stocks already trading at sky-high valuations.
Is a slow start to the year a bad omen for investors? I’ll look at how the market has performed both after a good and bad start in January, whether that could indeed be a predictor of future returns, and what investors may want to consider doing right now.
What the data over the past 25 years says
Going back to 2000, the S&P 500 has generated a positive return 12 times in January, and 13 times when it has been in negative territory. And when it has been a strong start to the year, the average full-year return for the S&P 500 has been 12.1%, versus just 2.9% when January has been negative.
But there are some notable exceptions to consider. Back in 2003, the S&P 500 fell by nearly 3% in January, but produced one of its best years, with a gain of 26% for the full year. And in 2018, when it started the year red-hot with a near-6% rise in January, it would end up finishing the year down by 6%.
Overall, the correlation between January’s return and the full-year return is just 0.35. This says that generally, there isn’t a strong relationship between how the market performs in the first month of the year versus the entire year.
Why January may not be a good indicator of how the year will go
It may be tempting for investors to try and predict patterns based on historical trends, but in the end, January is just one month. A lot can and will change during the course of the year, which will impact how the market performs.
In 2009, for example, when the market was beginning its recovery from the Great Recession, the S&P 500 fell nearly 9% in January. Based on the first month’s performance, investors may have been bracing for another tough year. But getting out of the market would have been a huge mistake — the index would end up recouping those losses and finishing the year with a 23% gain.
A bad start to the year could make it difficult for the index to finish the year positive. But that doesn’t mean that it’s likely to be down the remainder of the year.
What should investors do?
Buying stocks when the market declines often is a terrific idea for investors because you secure a lower price than you would have otherwise paid for a stock if it was soaring.
A slow start to January may seem like bad news for investors, but it could actually open up some attractive buying opportunities. Rather than trying to time the market, investors may simply be better off looking at cheap and undervalued stocks that may be good pick-ups right now.
Regardless of what the market may do in the short term, in the long run, it’s still likely to rise, which is why staying invested is often a much better idea than getting out of the market.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
