The Barometer

Sitting here at the end of February, let’s go ahead and reflect on January and what is referred to as the January Barometer. The January Barometer is, simply put, the theory that the performance of the S&P 500 in January dictates the direction the market will take for the rest of the year, or as is otherwise said “As goes January, so goes the year”.   According to a recent New York Times article the “January barometer has been right 87.7 percent of the time since 1950 (ignoring basically flat years) and 75 percent of the time including all years.”

So, about January, it was something of a roller coaster ride with something of a down turn in the market, for those that haven’t been following along at home. 

Why the ride you might be asking?  There are any number of factors that can be pointed to as to why the direction changed and why it has been such a tumultuous ride.  Gross domestic product growth slowed (which led to analysts changing profit forecasts for Q1, from an increase to a decrease), profits in the energy sector are nearly non-existent (as has been said, 5 dollars is officially gas money again), and a whole host of other worries from a fear of recession to concern over the Chinese economy.  All of these things are potential factors and pieces of the puzzle that has the market where it is.

Should you be worried?

No, not so much.  The January Barometer is much better at guessing a surge forward for the year than it is at predicting a downturn. 

“For example, CNBC notes the S&P 500 Index has risen in 23 out of 35 Januarys since 1979.  Over the next 11 months, the market subsequently rose in 19 of those 23 years—meaning a positive January has successfully predicted a winning February through December 83% of the time.  But in the years when January lost ground, there was only a 33% success rate in predicting a losing year.”

A 33% success rate at predicting a down trend isn’t something that you need to worry about, and the Barometer is only a theory, of which there are countless others to choose from.  Throw a penny and you’ll hit some theory based on some correlation between the market and whatever.  The fact of the matter is that market is driven by any number of variables and correlations can be found just about anywhere, but correlation is not causality.

The market is going to have its ups and downs, and we have been due a market correction for some time now.   Whether the market ends the year on a high note or a low note remains to be seen, there is no way to accurately predict what the year will bring.  That’s why it is important to remove the emotional aspect of investing, it is a long game where making emotional choices with only the current market environment in mind will more often than not hurt long-term return.

What we do know is that since December 31, 2013 the Dow has only gained 30 points, a long flat market like that can have a similar effect of as bear market.  We also know that Federal tax receipts were up by 5.2% yearly in January, this strongly suggests that US economic activity is expanding as do the unemployment claims.   While we certainly don’t take the January barometer as proof positive to anything, the stock market is currently in a downtrend and as such most of our portfolios are fairly conservative.  It is a marathon, not a sprint.


Market Commentary Disclosures:

The information contained herein is obtained from sources believed to be reliable but its accuracy and completeness is not guaranteed. Due to market volatility, any opinions expressed herein are subject to change without notice. Investors should be aware that there are risks inherent in all investments, such as fluctuation in investment principal.

The S&P is a market-cap weighted index composed of common stocks of 500 leading companies in leading industries of the U.S. economy.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.

Indexes are unmanaged, do not incur management fees, costs and expenses cannot be invested directly. Past performance is no guarantee of future results. Returns do not include sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Index returns include reinvestment of all dividends.

Sources: New York Times, CNBC, Thomson Reuters.

Neither NEXT Financial Group, Inc. nor its Representatives give tax or legal advice.