- Stocks ended January down, striking fear in those believing the adage, "As goes January so goes the year."
- Simply looking at one month's returns isn't sufficient for forecasting full year returns—stock markets know nothing of calendar months.
- Historical data prove a negative January is hardly reliable as a market predictor—the year's market performance has been positive about as often as negative when January is a down month for stocks.
- A single negative month isn't a sign the stock market recovery is derailed.
If we had a coin for every time we heard the investing adage, "As goes January so goes the year," we'd have an awful lot of coins. Pretty useful, since a coin flip is historically all it takes to figure out how the year will go following a negative January. Data show the market has a 50-50 chance of being either up or down when stocks drop in January—hardly a useful investing tool.
The S&P 500 ended January 2010 down -3.7%, striking fear in the adage-adherents. But why does January matter more for stocks than February, April, June, or August? It doesn't. In fact, other months have at least as good if not better track records of foretelling full-year returns than January. Yet they aren't seen as harbingers of future stock market zoom or doom. Nor should they be. We wouldn't recommend extrapolating those months' returns over the entire year either. Stocks know nothing of calendar months. Simply, the January saying is just a result of human nature trying to find patterns or correlations in an unpredictable system.
Historical data prove a negative January is unreliable as a market predictor. Categorizing S&P 500 returns from 1926 into the four possible scenarios for January and yearly market performance—1) up January and up year, 2) up January and down year, 3) down January and up year, and 4) down January and down year—the up January and up year scenario occurs the most at 54% of the time.* That shouldn't surprise since both January and full-year stock market returns have been more up than down over the years. An up January and down year scenario happens the least—10% of the time. But when looking at a down January, the year ends up 18% of the time and down 19% of the time, or roughly 50-50. Meaning, about as often as not, the year is up even when January is down—just like in 2009, when the S&P 500's 8.6% January drop didn't stop the index from finishing the year up 23.5%.
Instead of being handcuffed to calendar-based adages, investors would be better served focusing on the continuing recovery from the steep bear market. When you consider the second year of bull markets is almost always positive—there's only one negative going all the way back to the 1870s—history points toward a good 2010. Yes, we'll see negative months now and again. And we'll undoubtedly suffer a full-fledged stock market correction eventually. But these short-term down moves needn't derail the longer-term positive trend—bull markets don't move in a straight line.
History can't tell us the exact future, obviously, but it can help shape our expectations. And given the positive historical precedence for a strong second bull market year, plus improving fundamentals in the US and globally, healthy corporate earnings reports, and improving business outlooks, there's no reason to expect a negative 2010 for stocks just because indexes finished January in the red. We'll even bet you a coin flip on that.
*Source: Global Financial Data, Fisher Investments Research