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January Market Barometer

January Market Barometer

| February 03, 2020
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After Friday’s stock market close, the month of January is in the books.  The S&P 500 was up 2.82% for the month (through 1/22), and even after several negative days last week, was still up +1.6% as of Thursday, 1/30.  Friday’s big sell off (mainly due to concerns about the effect of the Coronavirus on global trade) basically gave back all of January’s gains.  The DJIA was -1.0% for the month, the S&P 500 was essentially flat at -0.2%, while the NASDAQ was up +2.0%.  

In the past I have mentioned the old market adage, "as January goes, so goes the year," which suggests that the first month of the year has a way of foreshadowing the performance of the year as a whole.  The idea is that if January brings a gain for the market, the rest of the year will follow suit and end in positive territory.  If the market is down for the month of January, the adage warns a loss for the year as a whole is likely.  The adage held true last year as the market gained 7.87% in January 2019 and 28.88% for the year.  However, we only have to go back to 2018 to find the last time the barometer was wrong as the S&P 500 had a strong showing in January 2018, gaining 5.62% during the month, but lost 6.24% for the year.  There is research to support the January bias using historical data going back to 1950, and courtesy of Dorsey Wright we have outlined some of the more relevant bullet points below.

Relevant January Barometer Stats: 

  • When the S&P 500 SPX records a gain in January, it has recorded a gain for the full year 88% of the time (38 out of 43). 

  • The average return for years starting with a positive January is +16.64% for the year.   

  • When the S&P 500 is down in the month of January, it has finished down for the full calendar year 52% of the time (14 out of 27). 

  • The average return for years starting with a negative January is -2.8%.   

  • The barometer has been "right," either to the upside or downside, about 74% of the time (going back to 1950).  

  • There have been 10 "really wrong" years, in which the SPX has logged a gain or loss of more than 5% in the opposite direction of January's return.

While the adage has an attractive success ratio, it is certainly not fail-safe.  In fact, 5 of those 10 years where the barometer has been "really wrong," have occurred since 2009, including 2014, 2016, and 2018.  We discussed the barometer’s 2018 failure above.  Meanwhile, back in 2016 SPX fell more than 5% in January, the seventh-worst January on record since 1950, before rallying to finish the year with a gain just shy of double digits.   Another point worth noting is that the “January Barometer” has been far better at predicting positive years than it has been in predicting losers. 

The image below depicts the past 69 years of data for the January Barometer.  Keep in mind that these historical tendencies are just that, tendencies, and should not serve as a primary indicator for anyone looking to tactically manage market risk.  If you are interested in reading more about the January Barometer concept, other month's "Barometer" capabilities, and how the theory applies to the Dow Jones and Nasdaq Indexes, you can review this piece published by stocktradersalmanac.com.

With this in mind, January 2020 ended up with a return between +0.24% in 1986 and -0.72% in 1953.  What will the rest of 2020 bring?  No one knows.  What we do know is that volatility has returned and we maintain our vigilance to help protect our clients from large losses.

As always, please contact us with questions or comments.

Until next time, Cheers!

Jim

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