There are myriad reasons to be bullish in 2013. We’ve written about a number of them in recent days. Media headlines have also recently featured seemingly positive stories—many of which, in our view, have little-to-no impact on market direction. Be bullish, but not for these reasons.
January 2013 started with a bang. And some believe that alone is reason to be bullish. Don’t believe it.
For those unfamiliar, the saying, “as goes in January, so goes the year,” has long been heralded by many to assert January’s returns are a blueprint for the full year. Interestingly, those headlines are more prevalent when January starts down, but you still see a few when January starts up. Either way, these views seem fundamentally flawed—and not just because short-term data (like monthly stock returns) aren’t reliably predictive of future market direction.
If you look at historical returns in January versus that year’s full returns (using US stocks for their longer data set), when January is down, odds yearly returns were up or down were little better than a coin flip. Interestingly, the commonest occurrence (54% of all years) is an up January and an up year. But that pattern is most likely because stocks generally post positive returns more often than negative (72% of all years are positive). Good or bad, January isn’t predictive.
Consumer confidence has been rising recently. Which is nice! But, again, no reason to be bullish.
Consumer confidence surveys do a pretty good job of confirming stock market and/or economic direction … last month. They are coincident at best, but mostly backward looking. Even as a contrarian indicator (as some folks view them, thinking you should buy when confidence is low and there’s ample buying pressure to push stocks higher) they’re broken, since it’s impossible to know if a relative high or low has formed until well after the fact. (They are as ineffective as the VIX in that way.)
It’s nice that folks were feeling better on average last month. But that’s about all you can take away from a confidence survey.
The Dow hit 14,000—just under its all-time high—on Friday.
We won’t quibble with folks who want to celebrate for the sake of celebrating. But we’d argue there are better things worth celebrating than the DJIA. As we wrote around this time last year, the Dow is a broken index. Partly because it doesn’t fairly represent the current global market. At 30 fairly arbitrarily selected stocks, it’s not even a great representation of the US market!
But (much, much) worse, the Dow is a price-weighted index, meaning a stock’s per-share price determines the impact it has on the index price. In other words, a $100 per-share stock has five times the impact of a $20 per-share stock, even though the $20 share might come from a firm 6 times bigger! Said another way, in any given year, DJIA index returns can easily be detached from the economic reality of the underlying shares’ returns. For more economically accurate index returns, you should prefer market cap-weighted indexes, like the S&P 500, the MSCI USA, the Russell indexes or, better yet, any number of global indexes.
So the Dow isn’t a great index, but why isn’t 14,000 significant? Well, it certainly is a nice, round number—but that’s likely all it is. Ultimately, 14,000 (or 20,000 or 150,000) tells you nothing about future direction. Neither, by the way, does an index’s high-water mark. The index doesn’t remember past levels, and it doesn’t care.
Finally, employment’s been increasing lately—which is great news. And it seems in line with private sector strength. After all, businesses won’t (can’t) hire unless they are financially sound enough to. But while total employment rose, so did the official unemployment rate—because of a quirk in the accounting. (Though that likely reflects more folks gaining confidence and joining the labor pool.) But overall, it was a positive report.
Higher employment reaffirms a point we often make here—the economy has in fact been growing, somewhat obscured by headline GDP figures. And if that continues, employment should continue to improve. All good news—particularly for job seekers and their families. But good or bad, employment is a symptom of past economic conditions. It doesn’t tell you about future direction.
So be bullish. But because of better-than-expected global economic growth, corporate America’s strength and political gridlock, among others. Not because of backward-looking or broken indicators.