Facts and Myths about January in the Stock Market
Posted: January 24, 2017
The January Barometer in the stock market is broken. The January Effect is looking a little wobbly. The January Rebound is alive and well.
No month except October has as much stock market lore associated with it as January. October is famous and feared as the month of crashes — most notably in 1929 and 1987. The January legacy is more complex.
You may have heard about the January effect. It is actually a confluence of three tendencies. (a) Stocks in general tend to rise in January. (b) Small stocks usually do well in the year’s first month. (c) Last year’s losers often bounce back. This phenomenon is often called the January Rebound.
How is the January effect doing this year? Small stocks haven’t done well, but the rest of the effect seems to be going as usual.
- Through January 20, the market as a whole, as measured by the Standard & Poor’s 500 Index, had risen 1.54%.
- Small stocks, as measured by the Russell 2000 Index, were down 0.35%.
- Last year’s big losers, as measured by a small-scale study I did over the weekend, were up 4.47%.
In the study, I looked for the ten biggest losers in the Standard & Poor’s 500 Index during 2016. Then I measured their performance in the first twenty days of this year. That’s too small a sample to draw firm conclusions, but the finding was in keeping with both logic and experience.
The Rebound
The January Rebound of the previous year’s losers is a tax-driven phenomenon, and it happens in many countries, not just in the U.S.
In November and December, investors frequently sell their losers in order to benefit from a tax deduction. The stocks that are kicked while they’re down, because of tax selling, may be driven below their intrinsic value. That’s why they often bounce back strongly in the new year.
Speaking of the January rebound, on November 15 last year I offered three suggestions for stocks that could benefit from the rebound, and that I also thought were decent bets for all of 2017. They were Ericsson Telephone Co. (ERIC), First Solar Inc. (FSLR) and Myriad Genetics Inc. (MYGN).
Through January 20, Myriad Genetics had continued to fall, down 6% in the still-young year. Ericsson was up less than 1% and First Solar had risen 8%.
The Barometer
Another aspect of the stock market’s January lore is the so-called January Barometer. It states that as January goes, so will go the full year.
Of course, January is a part of the year it is supposed to predict. So, a more meaningful question is whether January predicts the market’s course in the ensuing 11 months.
I have researched this question for all years from 1950 through 2016, using the Standard & Poor’s 500 as my measure of the market. Measured the crude way, the barometer has been right 75% of the time. Measured the better way (market action in the ensuing 11 months) it’s been right 69% of the time.
That might sound fairly good. But if you simply guessed every year that the market will be up, you would have been right 83% of the time for the full 12 months, and 80% of the time for the final 11 months of the year.
The barometer has been wrong in each of the past three years. In each case, January was down but the year was up.
That’s no fluke. In general, the barometer is a poor gauge when January is down. It predicts the next 11 months correctly in only 41% of the cases.
Since January isn’t yet over, it’s too early to tell what the barometer portends for this year. But I think you can see by now why I don’t care.
My Prediction
If calendar effects don’t tell us what will happen in the market, how should we handicap it?
You can start with the simple historical odds. From 1950 forward, the market is up more than four years out of five. Add to that a strengthening economy, interest rates that are still low, and prospects for reduced regulation and smaller taxes under a Republican regime. That’s the good part.
Potential negatives include the likelihood that interest rates will rise, continuing terrorist threats, high valuations on U.S. stocks, and the possibility of market surprises from President Trump, who is politically and diplomatically inexperienced.
My personal prediction is that 2017 will be an up year, maybe to the tune of 10%, but with severe gyrations along the way.