When January winds down, there’s one thing you can usually count on: A stream of articles touting the so-called January effect, which claims January’s returns will set the year’s course. Yet today, with one week till month’s end, a quick Internet search yielded only one.
Why the lack of “so goes January” commentary? Perhaps it’s because January’s been pretty nice so far—US and global developed markets are both up around 4.6% year to date, through Friday’s close. In that context, the January effect void continues a theme we’ve commented on before. Folks seem to lend abundant credence to technical indicators or seasonal patterns when they point to rocky times ahead. The Hindenburg Omen, Death Cross and several Dow Theory and Elliott Wave bearish signals have gotten plenty of traction throughout this bull market. And who hasn’t been advised to “sell in May and go away” every spring? Meanwhile, positive signals like the Golden Cross—equally powerless, on its own, to predict market behavior as its bearish cousins—are greeted with skepticism. Now, a positive January so far seems to have laid waste to the January effect in 2012.
In its place is the widespread notion the market’s rally isn’t for real—it “can’t be trusted,” “may stall” and “could be the last leg up before the next downturn.” One article warns, “Don’t drink the rally Kool-Aid!” Even the lone January effect piece we found today went on to say today’s equity investors are lounging in deck chairs on the Titanic. To us, that stance is just as ill-conceived as the January effect—it’s based on fears we’ve seen rehashed time and again, like tapped-out consumers, sovereign credit rating downgrades and ailing PIIGS, which in our view are overwrought.
Curiously, most observations on the current rally focus on the January 1, 2012 start date, as if calendar years signify something. Markets, however, don’t much care about the turn of a calendar page—they’ve been moving higher overall since what appears to have been the correction’s October 3 bottom. US and developed world stocks are up around 17% and 15%, respectively, since that date.
But whether you start with October 3 or January 1, why focus on such short periods at all? And why dwell on what’s already happened, rather than look to potential market drivers from here? Fact is, no single month’s returns (or day, week or any short period) tell us what’s going to happen in the period ahead. Fundamentals—and an assessment of how widely appreciated those fundamentals are—should underpin a proper forward-looking analysis.
If there’s one thing of value to glean from the lack of (admittedly nonsensical) January effect bullishness and the abundance of head-fake discourse, it’s this: It illustrates how black sentiment is. Yet while that dour sentiment prevails, there are many underappreciated fundamentals we think likely to buoy stocks this year. Some we’ve written about, like growing corporate revenues and profits, healthy global demand, US economic strength and a growing global economy. Others we’ll address in the days ahead. Of course, that doesn’t mean markets take a straight path up from here. Volatility could very well continue, and risks remain (as always). But so do little-noticed positives—and, in our view, in greater abundance.