“As the S&P 500 goes in January, so goes the year”
–The Stock Trader’s Almanac 2011
Whereas the “January Effect” I wrote about a few weeks ago provides precedence of small caps outperforming larger counterparts during the last two weeks of December, the quote above succinctly describes another annual effect among stocks.
Using annual figures going back to 1950, the “January Barometer” says the performance of the S&P 500 Index in the first month of the year dictates where stock prices will head for the year. Jeffrey and Yale Hirsch of The Stock Trader’s Almanac find that the barometer has a surprisingly high accuracy ratio of nearly 90 percent.
However, in the last two years, the market defied this trend. In January 2009, the market declined 8.6 percent, but ended the year increasing 23.5 percent. In 2010, the S&P 500 declined about 3.5 percent in January, but rose 15.1 percent for the year. But before these recent events, there were only five major errors in 60 years when the market was affected by the Vietnam War (1966 and 1968), the start of a mid-year bull run (1982), January rate cuts combined with 9/11 (2001), and military action in Iraq (2003).
Even with these disruptions in the long-term trend, the writers at Almanac Newsletter said last February that they “don’t know of many indicators with such a strong track record.” The barometer’s accuracy appears to be due to political actions that set the annual course for the U.S. In each odd numbered year, a new Congress convenes. Also, every year, the State of the Union address is delivered in January with the president and Congress setting the political agenda for the year.
What’s in store for 2012? Hear from Jeffrey Hirsch and me on January 10 for a special webcast where we’ll discuss barometers such as this one. Sign up now so you can catch it live or on demand shortly after the presentation.
Past performance is no guarantee of future results.
The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
