February 2016 Monthly Insight: The January Barometer

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Feb 15, 2016


“As January goes, so goes the year.” At least that is the case according the old adage made popular by the Stock Trader’s Almanac. This phenomenon is also known as the “January Barometer.” It simply means that January’s market’s performance, as measured by the S&P 500 Index, is a harbinger of how the market will do for the year.

According to a recent story in the New York Times, the January barometer has been right 88% of the time since 1950 (ignoring basically flat years) and 75% of the time including all years. Over the last 35 years, the S&P 500 has followed January’s direction 71% of the time (CNBC). On the surface, it seems like a reasonable indicator. But it’s important to point out the data includes January’s performance. In other words, how well or poorly month number one performs means you either have a head start or a handicap going into February. Still, January’s return has correctly foreshadowed February through December 66% of the time.

But the indicator does a much better job of predicting winners than losers, because markets are biased toward the upside. For example, CNBC notes the S&P 500 Index has risen in 23 out of 35 Januarys since 1979. Over the next 11 months, the market subsequently rose in 19 of those 23 years—meaning a positive January has successfully predicted a winning February through December 83% of the time. But in the years when January lost ground, there was only a 33% success rate in predicting a losing year.

“If you have a truly random variable, and there are, say, 60 million possibilities, it’s impossible not to find some pattern somewhere,” said Nassim Nicholas Taleb, a professor of risk engineering at New York University (New York Times). You can always find interesting but useless correlations because stocks rise over the long term.

Wacky market indicators include the Super Bowl winner, (This year’s winner, Denver, predicts a down market.), butter production in Bangladesh, and whether an American model lands on the cover of the Sports Illustrated swimsuit issue. There are plenty of reasons why markets go up or markets go down. So we don’t believe that January necessarily sets the tone for the year. Over the longer term, it’s about corporate profits, which are heavily influenced by the economy. In the shorter term, markets key off all kinds of variables. Long story short—what’s happening in the fall may make January look like a distant memory.

January’s poor start

There is no shortage of reasons why the year began on a sour note. For starters, economic growth moderated at the end of the year. Yet, a sizable chunk of the weakness has to do with the near collapse in profits in the energy sector, which factors into overall corporate profits.

For consumers, it has been a windfall at the gas pump. But the beleaguered energy sector has been a net negative for the economy, creating steep cutbacks in oil and gas projects, which have in turn roiled manufacturing.

What we sense when the market corrects

Many of us are painfully aware of the financial crisis of 2008. While the wounds have healed, the scars remain, and some investors have a propensity to keep both eyes on the rearview mirror. We get it. It’s human nature. It’s why we consistently advocate a disciplined investing approach – one that takes emotions out of the equation.

Every time clouds gather, we fear another deluge because the last storm is so fresh in our memory. No one can predict the future, but we will experience bumps in the road, and we may even go through another bear market. But rainstorms are followed by rainbows. It’s a graphic reminder that nasty weather is only temporary.

Know your risk tolerance

We always stress the importance of being comfortable with your portfolio and the risk you are taking. Market volatility is normal part of investing. While it can be managed, it can unsettle some investors. It’s why we subscribe to a time-tested philosophy of finding the right mix of assets for your situation and adhering to that mix. If your goals or personal situation changes, we can revisit your target.

When markets are rising, some investors miscalculate how much risk they can handle and opt for a bolder approach. While a more aggressive portfolio will likely create better returns over the long term, it’s not for everyone. Such a portfolio will see higher highs, but it will also see lower lows. A more conservative approach smooths out, but does not eliminate the volatility. It may not capture the same returns over the long term, but it will allow those who are risk averse to sleep better at night.

Let me add—resist the temptation to make buying or selling decisions based solely on the current market environment. Last month, we detailed the drawbacks of emotion-based investing (“voluntary investor behavior”), which can significantly reduce your long-term return.

Yes, the long-term approach requires discipline, but it has historically been the best path to reach one’s financial goals. We haven’t seen the end to the volatility – both upside and downside.

We hope you’ve found this review to be educational and helpful. As we always emphasize, it is our job to assist you! If you have any questions or would like to discuss any matters, please feel free to give us a call.

Finally, we want to say once again that we are honored and humbled that you have given us the opportunity to serve as your financial confidant and advisor. It’s a trust we never take for granted.

-The Nalls Sherbakoff Group, LLC.

 

DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.