The January Barometer – Will it be right in 2017?

The old market adage, “as January goes, so goes the year” suggests that the first month of the year has a way of foreshadowing the performance of the year as a whole. The idea is that if January brings a gain for the market, the rest of the year will follow suit on a positive note. If the market is down in the month of January, the adage warns a loss for the year as a whole is likely. For those who take interest in this predictive adage, January 2017 put the year on track for positive returns with the S&P 500 SPX* up 1.79%. While it was certainly not a record-breaking January, the adage implies that a gain alone is enough. There is research to support the historical bias using data going back to 1950 (source: Stock Trader’s Almanac).

Relevant January Barometer Stats:

  • When the S&P 500 SPX records a gain in January, it has recorded a gain for the full year 90% of the time (36 out of 40).
  • The average return for years starting with a positive January is +16.8% for the year.
  • When the S&P 500 is down in the month of January, it has finished down for the full calendar year 52% of the time (14 out of 27).
  • The average return for years starting with a negative January is -2.8%.
  • The barometer has been “right” about 75% of the time (going back to 1950)
  • There have only been 9 “really wrong” years in which the SPX has logged a gain or loss in excess of 5% in the opposite direction of the month of January.

While the adage has an attractive success ratio, it is certainly not fail safe.  In fact, 4 of those 9 years where the barometer has been “broken,” came within the past decade and one of them was last year. The SPX fell more than 5% in the month of January 2016, which was the seventh worst January on record since 1950. As we now know, the index finished the year with a gain just shy of double digits. Some of the other big outliers in the data set that went against the historical bias include 2009, 2010, and 2014.  Another point that bears repeating is that the “January Barometer” has been far better at predicting strong years than has been the case in predicting losers.

So now we’ve had the ‘First Week” indicator up which is positive for markets and we’ve had the January Barometer up which is also positive for markets. What does that tell us about 2017 markets? Actually, nothing.

Keep in mind that these historical tendencies are just that, tendencies, and should not serve as a primary indicator for anyone looking to tactically manage market risk.

Market Minute 2/3/2017 – And today’s markets are up…because?

The oldest debate in politics and economics revolves around wealth creation and redistribution- which is actually a debate about whether it is markets or government that controls the heights of the economy. One reason our politics in America are so divisive is that government has become so huge (Yuuuge!)  Those who benefit from big government fight hard to keep it big and those who want to slim it down have to fight harder to make cuts.  

While it would be untrue to say we don’t care about the politics of the situation, our focus is on the economics. Over the past eight years our economy has grown at an excruciatingly slow 2.1% average pace (compared that to the 30-year average of about 3.5%).  However, rising profits have still pushed the markets up by over 200%. Our country has created 15.6 million jobs since the low point after the financial panic of 2008. Companies have snapped up new technologies and employees and investors have reaped the rewards. These are things we can see.

The things we cannot see (economists call them opportunity costs) are the things that ‘could have been’.  Those things are the lost incomes, jobs ‘not’ created, and businesses not started.  It’s the fact that it is harder for the worker to progress when the economy is not growing as rapidly as it ‘could have been’.

Now, many economists tell us that the economy will not get better – because it cannot. Their opinion is that people ought to just accept slow growth. Fortunately, our new President does not believe this. We find hope in his talk that says ‘For too long, a small group in our nation’s Capital has reaped the rewards of government while the people have borne the cost. Washington flourished, – but the people did not share in its wealth’. We think he and his administration have got it right.  When markets are allowed to work freely we tend to have lower prices and higher quality. Conversely, when markets are constrained by third-party interference (usually of the government) – the result is higher prices and lower quality. A great example is public schools in inner-cities. 

So we’re encouraged by the reporting that the administration will cut government spending and cut down the government regulations which should logically result in more market forces and less controlled markets.  

OK, so to my point: Along with you, I heard the promises of the candidates. As usual, I doubted most of them. Yet it appears that the Pres is actually moving forward to put in place many of his promises. With yesterday’s announcement of a potential rollback of some of the Dodd-Frank regulations we expected to see markets ‘happy’ this morning. They are indeed happy, and as we would also have expected, bank-related and financial stocks are particularly happy.  

IF we see follow-through on promises or reduced corporate and personal tax rates and more loosening of regulations, we believe that this could indeed be a good year for markets – no matter what the early indicators are saying.  Here’s hoping!

Thanks to Brian Wesbury, Chief Economist at First Trust for these ideas.  

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners

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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.