“Prosperity is not without many fears and distastes; and adversity is not without comforts and hopes.” – Sir Francis Bacon
Question: Is it true that how the stock market behaves in January indicates what it does for the rest of the year?
Answer: “As January goes, so goes the year,” was conceived in 1972 by Yale Hirsch, the creator of The Stock Trader’s Almanac. The January Effect simply means that January’s market performance, as measured by the S&P 500 Index, is an indication of how the market will do for the year. Back-testing to 1937, the indicator’s success rate is 75%, and is most accurate during odd-numbered years. A notable exception was January 2009, when markets bottomed in March then moved magnificently upward 177.9% through February 5, 2016.
The indicator does a better job of predicting winners than losers because markets are biased towards the upside. Market correlations, although thought-provoking, only have negligible value because most investors’ portfolios don’t replicate the actual market.
Other market indicators include the Super Bowl winner, butter production in Bangladesh, and whether an American model appears on the cover of the Sports Illustrated swimsuit issue (Investopedia). Emotion also contributes greatly to short-term volatility. True market valuation is based on corporate profits, which are driven by the economy.
Reasons for January’s Poor Start
Economic growth is measured by Gross Domestic Production (GDP). This fell from an annual rate of 2.0% in the third quarter to 0.7% in Q4, according to the U.S. Bureau of Economic Analysis. Analysts reduced S&P 500 profit growth projections. However, slower growth is not the same as a contraction.
The weak energy sector slows growth. Cutbacks in oil and gas projects slow manufacturing and negate the economic boost to consumers’ savings at the gas pump. The strong dollar creates resistance for sales of U.S. goods overseas. While a strong dollar is a gift for Americans vacationing in foreign countries, it works against revenues of U.S. firms who need to convert sales back to strong U.S. dollars. Then there are worries about China, oil prices, recession fears, woes in manufacturing, rising yields in junk bonds (mostly, but not limited to, energy and the mining sectors), the Federal Reserve, political uncertainty, and even stock sales by sovereign wealth funds. Ultimately, what happens in November may have greater impact on markets than the January Effect.
Pain from the 2008 financial crisis is fresh. While the wounds may have healed, scars remain causing some to focus only on the rearview mirror. It’s just human nature. Yet someone investing in the S&P 500 Index at the top in October 2007 would’ve earned 4.9% on an annualized basis, including reinvested dividends (S&P 500 Dow Jones Indices), through the end of January, reminding us why a disciplined and unemotional investment approach is recommended.
Investor Know Thyself
Market volatility is normal, yet it still rattles the best of us. While a more aggressive portfolio will likely create better returns over the long term, it’s not for everyone. Higher highs often mean lower lows. When markets are rising, investors tend to believe they have a higher risk tolerance than they do when markets are correcting. Downside volatility easily turns into sea-sickness, causing some to abandon ship. That’s why the time-tested methodology of establishing an appropriate mix of assets for your unique situation, and staying with that formula, is suggested. Understandably, if your goals or personal situation changes, revisit your mix.
A more conservative approach may smooth out the ride, but it doesn’t eliminate volatility. You might not capture the same returns over the long term, but it may provide peace of mind. Understand how much downside you can stomach and have adequate cash on hand for current expenses. Resisting the temptation to make emotionally based investment decisions based solely on current market activity isn’t easy. The long-term approach requires discipline, and often the help of a financial coach, but historically provides a path to help in obtaining one’s financial goals. Stay focused and plan accordingly.
The opinions expressed are those of the writer, but not necessarily those of Raymond James & Associates, and are subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.
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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. Call or email Darcie at 239-389-1041 or firstname.lastname@example.org with questions or suggestions for future columns. Visit her website: www.raymondjames.com/Darcie