We’ve started a new investment feature designed to give you some background on current market trends. Our third piece tackles a trend that can give you a good indicator of things to come in the upcoming financial year:
Picture a world that had an indicator that told you every year on January 31st whether you ought to stick in the equity markets for the balance of the year, or park your money elsewhere for the next 11 months.
Can you imagine how much emotional (and financial) pain you could avoid with such an indicator? In reality, you don’t have to stretch your imagination that much because we live in a world with a measuring stick that has been reliable more than 70 percent of the time.
It’s called the January Barometer, which has successfully predicted with that frequency whether stocks will finish higher or lower for the year. First discussed in 1972 by Yale Hirsch, founder of the Stock Trader’s Almanac, the January Barometer states that the direction of the Standard & Poor’s 500 during January can be viewed as an indicator of the market over the following 11 months.
No one has ever authoritatively explained this predictive anomaly but one could argue that budget planning for business and government sets the overall tone for the economy by the end of January.
Although most investment pros are skeptical of such an agnostic investment indicator, the January Barometer has been right for 62 of the past 85 years, or 73 percent of the time, according to CNBC. Over the last 35 years, the January Barometer has been correct 25 times (71 percent) for the S&P 500 and 29 times (83 percent) for the Dow Jones Industrials.
Any indicator that has stood the test of time at such a consistently high rate should not be lightly dismissed. At the same time, it is far from a slam-dunk guarantee.
For example, in 2009, the S&P 500 dropped 8.57 percent in January before coming on strong and closing the year up 26.46 percent. The next year, the S&P 500 dipped by 3.70 percent in January before closing the year up by 15.06 percent.
What is most striking here is not so much that each of those years saw gains for the S&P 500, but the robust size of those gains. Equity investors are generally happy with returns of 8-10 percent and they would be severely disappointed if they sold their stocks in January 2009 or January 2010 and missed out on those years’ substantial appreciation.
So where would this crystal ball leave us this year? The S&P 500 fell 3.56 percent in January while the Dow Jones Industrials was down 5.30 percent. Both would have prompted followers of the January Barometer to exit the stock market at the end of January. Since then the S&P 500 has risen 10.1 percent while the Dow Jones is up 7.89 percent. Clearly, the January Barometer has not worked so far in 2014.
But like other imperfect indicators, the January Barometer is an indicator that investors should be aware of and factor into their decision-making as the year progresses.
DISCLAIMER: The information contained in this article is not a solicitation to sell securities or investment advisory services where such an offer would not be legal. Information included in this statement regarding market or other financial information is obtained from sources believed to be reliable. Past performance is never a guarantee of future performance.
John Maguire has been an Investment Advisor for more than 30 years. He is a Managing Partner of Hinsdale-based Rationalis Capital Management, LLC, online at www.rationaliscapital.com. He can be reached at email@example.com.