Monday, July 11, 2022
HomeFinancial AdvisorAs Goes January, So Goes the Year?

As Goes January, So Goes the Year?


The idea behind the old adage “as goes January, so goes the year” is this: if the market closes up in January, it will be a good year; if the market closes down in January, it will be a bad year. In fact, it is one of the more reliable of the market saws, having been right almost 9 times out of 10 since 1950. Last year, January saw gains of 7.9 percent for the S&P 500 (the best January since 1987), predicting a very good year. Indeed, that is just what we got.

In fact, even when this indicator has missed, it has usually provided some useful insight into market performance during the year. In 2018, for example, the January effect predicted a strong market. And it was strong—until we got the worst December since 1931 and the markets pulled back into a loss, only to recover immediately and resume the upward climb. Wrong according to the calendar, right over a slightly longer period.

Wall Street “Wisdom”?

I am generally skeptical of this kind of Wall Street wisdom, but here there is at least a plausible foundation. January is when investors largely reposition their portfolios after year-end, when gains and performance for the prior year are booked. So, the market results really do reflect how investors, as a group, are seeing the coming year. As investing results are determined in significant part by investor expectations, January can become a self-fulfilling prophecy, which is why this indicator is worth looking at.

Looking Ahead

So, what does this indicator mean for this year? First, U.S. outperformance—and the outperformance of tech and growth stocks—is likely to continue. Emerging markets were down by almost 5 percent in January, and foreign developed markets were down by more than 2 percent. U.S. markets, by contrast, were down by less than 1 percent for the Dow and by only 4 bps for the S&P 500, and the Nasdaq was up by just over 2 percent. If you believe in this indicator, then stay the course and focus on U.S. tech, as that is what will outperform in 2020.

The problem with that line of thinking is that what drove this month’s results was a classic outlier event: the coronavirus. This virus, or more accurately the measures taken by governments to control its spread, has significantly slowed the economies of several emerging markets directly (China and most of Southeast Asia), and it is starting to slow the developed markets through supply chain effects. The U.S., with a relatively small part of its supply chains affected so far and with minimal direct effects, has not been as exposed—but that trend might not continue.

In other words, what the January effect is telling us this time potentially has much more to do with the specifics of the viral outbreak than with the global economy or markets—and may therefore be less reliable than in the past.

The Real Takeaway

What we can take away, however, is that in the face of an unexpected and potentially significant risk, the U.S. economy and markets continue to be quite resilient. That resilience will help if the outbreak gets worse, and it will point to faster growth if the outbreak subsides. Either way, the U.S. looks to be less exposed to risks and better positioned to ride them out when they do happen.

Which, if you think about it, points to the same conclusion as the January effect would. Expect volatility, but not a significant pullback here in the U.S. over 2020, with the prospect of better-than-expected growth and returns. And this is not a bad conclusion to reach.

Editor’s Note: The original version of this article appeared on the Independent Market Observer.



RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisment -
Google search engine

Most Popular

Recent Comments