January Is the Market's Groundhog?

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by Timothy D. Carkin, CAIA, CMT
Senior Vice President

Week in Review

This week we experienced something we haven’t in some time: a down week. Stocks struggled to a close, down 4 percent with no help from blue-chip names. Alphabet (GOOGL) and Apple reports weren’t favored by Wall Street, driving the stocks down 5.3 and 4.4 percent, respectively. Each day this week a morning rally has been met with afternoon selling, showing that the market feels a bit ahead of itself. On that note, rising interest rates might be adding to the dismay - the 10-year U.S. Treasury yield rose again this week to 2.83 percent, pushing equity investors to question their inflation expectations. The FOMC did not raise rates this week but hinted at continuing the gradual rate of increases. Adding to inflation questions, non-farm payrolls showed job growth was solid again which should lead to wage-based inflation. Traders are now juxtaposing rising wages, which is good for the economy, and rising inflation, which may not be as good for the market.

January is the Market’s Groundhog?

Every year Punxsutawney Phil emerges from Gobbler’s Knob and predicts the weather. Most of us don’t speak Groundhogese, but it’s a fun tradition to wait and see if he’s correct. Wall Street has its own version of that loveable rodent’s tradition: the month of January. There’s a saying on Wall Street, “So goes January, so goes the year.” It’s a great rallying cry for some investors and it’s interesting to see how often it is right. But remember, just like taking a weather report from a woodchuck, we don’t advise basing any investment decisions solely on coincidence.  

January finished with a fizzle but that couldn’t dampen the electric start ratcheting the S&P 500 up 5.6 percent. That is the 11th best January since 1950. Over that period, 38 of the 40 years with an up-market in January have brought an up-year for stocks. Also, there has never been a down year for stocks when the S&P 500 has gained at least 4.0 percent in January. If you look at the below chart, the “January Effect” can be rather persuasive. Before exuberance takes over, a point of caution: the best January was in 1987 when the markets rallied 13.2 percent. A crash in October of that year whipped out nearly all the gains.

So how come the “January Effect” is correct so often? It’s a matter of correlation, not causation. It only works with up Januaries, not down. The stock market is up nearly three times more often than it is down annually. From the eyes of a technical analyst, the “January Effect” is simply a story of momentum, similar to Newton’s first law. An object (the market) will remain in uniform motion (rallying) unless compelled to change by the action of an external force (myriad geopolitical, fundamental, monetary issues). Simply put, if the market is rallying, it will continue to do so until something knocks it off its course. 

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We are still early in the year and volatility may pick up and cause a pullback which could scare investors after such a consistent rally we’ve enjoyed. In short, this Wall Street saying might better be interpreted as an anecdotal experience telling investors to exercise caution in the face of a selloff. Don’t overreach and sell, this January was up and the year could be as well.

Takeaway for the Week

  • The market’s groundhog predicts a good year for stocks