“As January goes, so goes the year” in the stock market.
Thus runs a common belief among traders. If you believe it, you’re probably scared right now, as the Standard & Poor’s 500 Total Return Index was down 7.66% in the first three weeks of this year.
Take heart. The January indicator belief – often called the January barometer – is a superstition.
I’ve studied market action from 1950 through the present to see if this barometer means anything. That’s a period of 72 years.
In the crudest sense, the barometer was right 77% of the time. However, a naïve forecasting model that predicts every year will be an up year was right 79% of the time. That doesn’t speak well for the putative barometer.
But wait, it gets worse.
January is, of course, part of the year it’s supposed to predict. So a fairer test would be: How well does January predict the next 11 months? On that basis, it has been right only 67% of the time.
Most important for the jangled nerves of traders is this question: How accurate is the barometer in years when January is down? Here is where the fallacy of January’s prophetic quality really falls apart.
From 1950 through 2021, January has been down 29 times, but in only 12 cases did the market decline for the full year. That’s an accuracy rate of 44%, worse than chance.
Can I offer assurances that the market will be up this year? No, no one can. But whether it’s up or down for the year is in no way determined by market action of the first three or four weeks.
For what it’s worth, my own prediction is for the market to post positive single-digit returns this year. Investors’ chief worry is rising interest rates. But I think Edson Gould, a market pundit of the 1930s through 1950s, was on the right track when he said it takes three rate hikes to derail stocks.
He called it the “three steps and a stumble” rule. In Gould’s day, the Federal Reserve usually raised interest rates in half-point increments. Today the Fed tends to use quarter-point moves. So I think it might take more than three rate hikes to produce serious trouble for stocks.
January effect
Another piece of market lore attached to January is the January Effect. Really, this is a confluence of three effects.
- Stocks in general tend to rise in January.
- Small stocks usually do well.
- Last year’s losers often bounce back in a “January rebound.”
So far this year, I see no sign of the January effect. The first element, a general market rise, obviously isn’t happening. Small stocks aren’t doing much better than big ones. The Russell 2000 Total Return Index, a small-cap index, is down 6.97% through Jan. 21.
As for last year’s losers, they are getting beaten up again. In December, I wrote about five stocks that has suffered remarkable declines in 2021: Peloton Interactive Inc. (PTON, Financial), Altice USA Inc. (ATUS, Financial), Zillow Group Inc. (ZG, Financial), Coupa Software Inc. (COUP, Financial) and RingCentral Inc. (RNG, Financial).
All five of these unfortunate stocks have fallen more than the S&P 500 in the first three weeks of 2022. Collectively, they are down 17%, on top of their losses last year (which ranged from 50% to 76%).
I don’t have systematic data on the January effect the way I do on the January barometer. But I can say from personal experience that it’s far from a sure thing. In 2018, for example, I lost a bundle of money buying call options on the previous year’s downtrodden stocks.
What’s up
While it’s been a tough year so far, not everything is falling. About 10% of stocks are up. Many of the gainers are energy stocks.
Oil and gas producers have slashed the number of active oil and gas wells in North America in the past three years, to less than 500 from more than 800. As a result, oil and gas prices have been rising, and many energy stocks are doing well.
Two oilfield service giants, Schlumberger Ltd. (SLB, Financial) and Halliburton Co. (HAL, Financial) are both up about 15%. A slew of other energy stocks are also up, including Hess Corp. (HES, Financial), Occidental Petroleum Corp. (OXY, Financial) and Phillips 66 Partners LP (PSXP, Financial).
My feeling is that the energy industry rally has further to run. These stocks were on their knees for six years, beginning in mid-2014. Many are still reasonably valued.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston. His firm or its clients may own or trade stocks discussed in this column. He can be reached at [email protected].
