As January Goes, So Goes the Year

The stock market has put up weekly gains for five consecutive weeks now and has finished in the green in eight of the last ten. The DJIA closed Friday at its highest level since the market bottomed on March 9, 2009. The NASDAQ finished last week at its highest level in eleven years. And January was one of the best in years. But with the news shows still droning on about all the macro risks, investors may be wondering if any of the above is meaningful.

As I’ve said a time or twenty, the purpose behind my daily missive is to try and identify the market’s primary driving forces. On that score, there are clearly problems in Europe and the market may not respond well at all to a sudden default in Greece. However, the recent action in the market would seem to suggest that investors are moving beyond the fears of what might happen in Europe and focusing instead on the good things that might be happening in the good ol’ USofA.

Yes, I recognize that the recent data might be painting an overly optimistic picture and that the string of better than expected economic reports may not last. But as I wrote last week, without a debacle across the Atlantic, an economy that is showing signs of slow and steady improvement just might be enough for this stock market.

So, with the caveat that any big, bad surprises would likely throw a monkey wrench into the bulls’ plans, I thought I’d look at history to try and determine if the stellar performance seen in January has any meaning.

Cutting to the chase, it does appear that some of the goings on during the month of January do have meaningful leading tendencies from an historical standpoint. For starters, I’m sure everybody is aware of the old saw “As January goes, so goes the year.” And for the most part, this is a fairly accurate predictor of market performance going forward. However, it is also worth noting that the market has risen more often than not during any given calendar year in the past and as such, the “January Barometer” might be flawed.

But in digging around to see if I could turn up anything really meaningful that occurred in January, it struck me that after six or seven straight months of extremely violent price movements, the volatility largely stopped last month. In fact, January was unusual in that there wasn’t a single day in which the S&P fell by even 1% (the biggest daily decline was just -0.6%). And according to the computers at Ned Davis Research, there have been only 18 other January’s that did not contain at least one bad day.

While this may sound like one of those fun facts to know and tell, history shows that such an event has been quite meaningful in terms of what to expect for the remainder of the year. Although January’s without a single 1% down day haven’t meant much in terms of predicting the return seen in February, they have produced outsized gains more often than not for the February – December period.

In fact, of the 18 years in which the month of January didn’t see at least one daily drop of -1%, 15 finished higher – a lot higher. On average, the S&P 500 gained +22.07% during February through December, putting the average gain for these calendar years in excess of +27%. And after what stock market investors have been through lately, that type of return probably sounds pretty good right about now.

In addition, a strong showing by the market in January tends to carry over to the remainder of the year. For example, since 1950 the S&P 500 has gained more than 4% in the month of January only 17 times. And in 16 of those occurrences, the market went on to produce gains on the year that approached +20%.

In looking at the overall record of the “January Barometer” as well as the returns in which January has either been strong or not volatile, it is clear that the odds favored the bulls by a country mile. So, while stocks are overbought and are due for a pullback, unless something bad comes along to throw the macro view back into the cellar, it might be a good idea to start looking at the glass as at least half full for a while. I know, I know, things are terrible in Europe and the sky might actually fall this time. But, I’m just saying…

Turning to this morning… More concerns about Greece and a lack of action by Chinese monetary officials is pushing stock futures a bit lower this morning.

On the Economic front… There are no reports scheduled for release before the bell today. All eyes will be on Ben Bernanke at 10:00 am eastern.

David Moenning
Editor:  Short-Term Market Manager