The January (Non)Effect

With a week remaining, the S&P 500 stands on the edge of being negative or positive for January. Should investors await the final number with bated breath, knowing, “So goes January, so goes the year?” Or is it already too late? According to some, the first five trading sessions are the predictor, and since this year’s first five were down, the theory goes a down year lies ahead. But wait! During midterm election years, the year supposedly goes opposite January. And don’t forget the Super Bowl indicator has yet to issue a verdict. Nor has the groundhog! (We know—that last one is said to forecast weather, not whether or not you have six more weeks of a market cycle.) Well, you get the point. What’s an investor to do with all these indicators flying about? Our suggestion: Discard them. All of them. Basing any kind of financial decision off seasonal adages or the like commits the fundamental error of believing past performance predicts future returns.

“So goes January, so goes the year” claims the year’s first month has some sort of influential or predictive power no other month has. But it’s hard to find evidence supporting that notion. Since the S&P 500’s inception in 1926, January has been up 55 times, or about 63% of the time, The S&P historically has been up about 72% of the time—not too surprising since over the long term, stocks move up, so you’re naturally likely to have more up months. But the 32 down Januarys have shown even less predictive consistency: 16 years finished up and 16 down—exactly even.ⁱ In that light, January’s performance doesn’t seem hugely indicative to us.

But the theory lacks more than evidence. It also doesn’t have a logical, explanatory underpinning, since it commits a larger fallacy: using past performance to predict future returns. Stocks look forward, moving mostly on the gap between the perception of public companies’ ability to generate higher profits and their actual ability to do so. The perception—sentiment—may vacillate widely on seemingly small factors and cause brief hiccups in market direction. Even in 2013, an overall stellar and relatively placid year, there was a -5% pullback midyear.ⁱⁱ But in the long run, as Benjamin Graham once said, “Markets are weighing machines,” measuring fundamental factors like profitability and sales. What stocks don’t move on: January’s performance in 2013, 1999 or 1926. Or 2009, 2003 or 1935 (three years in which the S&P declined in January, yet rose in the full calendar).ⁱⁱⁱ Or, for that matter, the turn of any calendar page—whether your calendar is weekly, monthly or a Page-a-Day calendar featuring cat photos.

Wherever this January ends, the key is to look forward! And in doing so, here are some forward-looking reasons why we believe stocks will be up big again this year. Investors and analysts overall seem to have middling expectations—few expect a down or strongly positive year, with bulls less bullish and bears less bearish. But this perception, in our view, isn’t a fully accurate read on overall accelerating economic global growth. With high and rising LEIs in most of the world and areas like the eurozone and many Emerging Markets doing better than expected, there is a bullish gap between this hum-drum sentiment and a brighter reality. As markets determine the heft of these positive fundamentals, sentiment likely gradually catches up, bringing higher valuations and stocks prices with it. Factors like these—and not where the earth happens to be on its journey around the sun—move stocks. So as entertaining as all these variations of seasonal mythology may be, leave those “strategies” off the table when it comes to managing your money and look ahead instead.

For more, see our video on The January Effect.