Author: Montecito Capital Management
Every January, Wall Street dusts off one of its oldest seasonal indicators: the performance of the first five trading days of the year. It may sound quaint in an era of AI trading models and high-frequency algorithms, yet history continues to give this early signal more credibility than many would expect.
Going back to the post-war era, when the S&P 500 has finished the first five trading days of January in positive territory, the market has gone on to end the full year higher roughly 83% of the time. Even more compelling is the return profile. In those years, the average full-year gain has landed in the 13% range – more than double the typical return when the first week of January was negative. That doesn’t make the first week a crystal ball. But it does make it a remarkably consistent barometer of investor psychology.
Markets are driven as much by investor sentiment (confidence) about the prospects of companies, then what historical earnings that have already been released. Indeed, a strong opening week often reflects institutional buying, healthy liquidity, and early optimism around the forecasts of forward-looking earnings, interest-rate expectations, and economic momentum. When money managers start the year leaning into risk rather than hiding from it, that posture tends to persist longer than many expect. The logic is not mystical. Portfolio rebalancing, fresh inflows into retirement accounts, new capital allocations, and renewed risk appetite all converge in January. When those forces align positively, momentum frequently follows.
This short-term signal also connects to a broader seasonal pattern known as the January Barometer – the long-standing market adage that “as January goes, so goes the year.” Historically, when the S&P 500 finishes the month of January higher, the market has ended the year positive about 86% of the time, with average full-year gains north of 16%. It is one of the more durable seasonal tendencies in U.S. equity history. Again, it isn’t that January causes markets to rise. Rather, January often reflects whether investors believe economic and earnings conditions justify higher equity prices. That belief matters.
And lately, the economic backdrop has been giving investors reason to stay constructive. The most recent GDP data for the fourth quarter of 2025 surprised sharply to the upside, pointing to one of the strongest late-cycle growth readings in years. Fourth-quarter expansions of that magnitude are historically rare this deep into an economic cycle, and they reinforce the idea that consumer demand, corporate spending, and overall economic resilience remain stronger than many had feared.
Strong growth doesn’t guarantee strong markets. But it supports earnings, stabilizes balance sheets, and gives investors confidence that the economy is not slipping quietly into contraction. When economic data, earnings expectations, and market momentum align early in the year, the odds of a constructive full-year tape improve materially.
None of this suggests investors should abandon discipline or risk management. Seasonal indicators fail in some years. Shocks happen. Policy changes. Valuations matter. But history shows that early-year market strength has rarely been meaningless. The first five trading days don’t decide the year, but they often reveal the market’s underlying tone. And when that tone is optimistic, supported by improving growth data and reinforced by a strong January, the market has historically rewarded investors who respected the signal rather than dismissed it.
Whether 2026 ultimately follows that script remains to be seen. But once again, the calendar is offering Wall Street a familiar – and historically persuasive – opening clue.