The all-important month of January has come and gone, leaving behind an omen that might jinx the stock market for rest of 2015.
Known as the “January Barometer”, the direction of the stock market during the month of January has become an extremely reliable foreteller of the market’s direction for the rest of the year. How reliable?
According to the Stock Trader’s Almanac, it has a batting average of .766 – which is better than professional baseball players, the top batting average of all time being .366 held by Ty Cobb.
January has an even better success rate during the third year of the presidential cycle (which 2015 is), having correctly foretold the year’s overall direction in 14 out of 16 pre-election years for a success rate of 87.5%.
It is so accurate, in fact, that “many technicians modify market predictions based on January’s market,” the Stock Trader’s Almanac warns us.
Now that January’s books are closed, what does it portend for the remainder of 2015? Should we be altering our own investment strategies based on the January Barometer, as some analysts are expected to do? Let’s take a closer look.
Two January Patterns in Opposition
First off, we need to differentiate between two different January patterns that many technicians often swear by. It may strike us as odd that university-schooled professionals would consult these patterns. But for them, it’s really just a play on the odds.
Where the January Barometer mentioned above covers the entire month of January from the first trading day to the last, there is another January pattern that spans the month’s first five trading days only – known quite logically as the First Five Days.
Both spans of time are supposed to predict the direction of the year as a whole: as goes the pattern, so goes the year. And both have had impressive records of accuracy:
• As noted above, the month of January has accurately predicted the entire year’s direction 76.6% of the time across all years since 1950, and 87.5% of the time among all pre-election years since 1950.
• The First Five Days, for their part, have accurately predicted the entire year’s direction in 35 of the last 41 years since 1974 (85.4% accuracy), and 12 out of the last 16 pre-election years (75% accuracy).
So how did this year’s two January patterns perform? As graphed below, the two patterns are giving us conflicting signals. Where the First Five Days were up (green line), the month of January as a whole was down (red line).
What do we do now? Do we favor the First Five Days since it has a better record than the whole month across all years? Or do we favor the whole month since it has the better record across all pre-election years?
Can you see what I’m driving at now? Statistics are at best just interesting anecdotes to pass around among our friends and workmates. But sound investment decisions should never be tethered or anchored to them.
Remember that even with such accurate past records as 75%, 76%, 85% and 87%, it still leaves some 13% to 25% of the times when these patterns were dead wrong – as often as one in four.
Ultimately, then, investors must look at the prevailing economic conditions at the present time and base their investment decisions on what is happening now, not on what happened way back when.
So what is happening now? Yesterday gave us some interesting insights that would serve as more reliable bases upon which to formulate our decisions.
Encouraging Reports Lift Markets
Two reports in particular released yesterday at 8:30 am eastern time, an hour before U.S. markets opened, started the new month of February on a negative tone, causing the S&P 500 index to fall nearly 18 points or 0.9% within the first 30 minutes, as graphed below.
First, consumer spending for the month of December fell 0.3% compared to a rise of 0.5% in November. December is supposed to be the best shopping month of the year, which was expected to be above average given the enormous savings on gasoline that consumers have been enjoying for several months already. Second, personal incomes for December rose 0.3%.
These two reports together indicate that Americans took that extra 0.3% in wages and stuffed it under their mattresses, choosing not to spend it. Adding that 0.3% in additional wages to the 0.3% decline in spending meant that consumers increased their savings by 0.6% in December – which is very bad for consumerism, businesses and stocks. Hence, the plunge at the start of the day.
But notice the abrupt change in market sentiment beginning shortly after 10 am? That came on account of two rather positive reports released at 9:45 and 10:00.
First, the Markit Manufacturing Purchasing Manager’s Index derived from a survey of 600 U.S. industrial companies showed a reading of 53.9 for January, where a reading above 50 indicates manufacturing expansion, while a reading below 50 indicates contraction.
After reaching an all-time high of 57.9 this past August, the index had fallen for four consecutive months until reaching 53.7 in December. January’s up-tick gave the markets a little optimism that the slow down in U.S. manufacturing may have finally stopped, pointing toward growth going forward.
A second gust of optimism came a few minutes later from December’s Construction Spending report which showed an increase of 0.4%, which was better than November’s decrease in spending of 0.2%.
At first, the markets were a little disappointed, since the estimate on the street was for a rise of 0.7% in December. However, the report did adjust November’s decline from an original -0.3% to -0.2%. After a while, traders accepted that the report was really pretty good overall, helping turn the market up from which it never turned back – closing the day up 25.86 points for a solid 1.3% gain on the day.
The Here and Now
As it stands, then, the markets seem to be looking forward to some growth in the economy, with increased construction spending pumping more money into the housing market, which will ultimately work its way through all the sub-industries connected to it. Manufacturing seems to have stopped its decline, and incomes have finally begun to increase – one of the last ingredients missing from the economic pie.
Remember as well that the Federal Reserve is still unable to raise interest rates while the U.S. dollar is so strong for fear that it will stop all inflation and actually cause deflation. Yesterday’s core inflation number released before the market opened indicated another drop in inflation from an annual rise of 1.7% in November to an annual rise of 1.6% in December – slipping further below the Fed’s 2% annual target, meaning that the Fed won’t do anything to slow the economy down for a while.
Weighing together all of this current data, then, presents a much different picture than the historical data from years and decades gone by. Most analysts looking at the current economic picture are still expecting double-digit growth for U.S. stock markets (above 10%) by the end of this year.
Of course, it’s always fun to toss around historical statistics, and sometimes they are even worth a short-term bet or two. For instance, according to the Stock Trader’s Almanac, on the last trading day before President’s Day (which is Friday the 13th this month), the S&P has been down 17 out of the last 23 times.
But investing for our future is no fun and games. It’s serious business and requires sound reasoning based on current data and sound economic indicators. I’m still keeping my Trader’s Almanac, though; just because I like numbers so much.