As Goes January, So Goes the Year?

Brad McMillan, CFA®, CAIA, MAI
Brad McMillan, CFA®, CAIA, MAI

02.05.20 in Market & Economic Perspectives

Estimated Reading Time: 4 Minutes (619 words)

Market and Economic Perspective

The idea behind the old adage “as goes January, so goes the year” is this: if the market closes up in January, it will be a good year; if the market closes down in January, it will be a bad year. In fact, it is one of the more reliable of the market saws, having been right almost 9 times out of 10 since 1950. Last year, January saw gains of 7.9 percent for the S&P 500 (the best January since 1987), predicting a very good year. Indeed, that is just what we got.

In fact, even when this indicator has missed, it has usually provided some useful insight into market performance during the year. In 2018, for example, the January effect predicted a strong market. And it was strong—until we got the worst December since 1931 and the markets pulled back into a loss, only to recover immediately and resume the upward climb. Wrong according to the calendar, right over a slightly longer period.

Wall Street “Wisdom”?

I am generally skeptical of this kind of Wall Street wisdom, but here there is at least a plausible foundation. January is when investors largely reposition their portfolios after year-end, when gains and performance for the prior year are booked. So, the market results really do reflect how investors, as a group, are seeing the coming year. As investing results are determined in significant part by investor expectations, January can become a self-fulfilling prophecy, which is why this indicator is worth looking at.

Looking Ahead

So, what does this indicator mean for this year? First, U.S. outperformance—and the outperformance of tech and growth stocks—is likely to continue. Emerging markets were down by almost 5 percent in January, and foreign developed markets were down by more than 2 percent. U.S. markets, by contrast, were down by less than 1 percent for the Dow and by only 4 bps for the S&P 500, and the Nasdaq was up by just over 2 percent. If you believe in this indicator, then stay the course and focus on U.S. tech, as that is what will outperform in 2020.

The problem with that line of thinking is that what drove this month’s results was a classic outlier event: the coronavirus. This virus, or more accurately the measures taken by governments to control its spread, has significantly slowed the economies of several emerging markets directly (China and most of Southeast Asia), and it is starting to slow the developed markets through supply chain effects. The U.S., with a relatively small part of its supply chains affected so far and with minimal direct effects, has not been as exposed—but that trend might not continue.

In other words, what the January effect is telling us this time potentially has much more to do with the specifics of the viral outbreak than with the global economy or markets—and may therefore be less reliable than in the past.

The Real Takeaway

What we can take away, however, is that in the face of an unexpected and potentially significant risk, the U.S. economy and markets continue to be quite resilient. That resilience will help if the outbreak gets worse, and it will point to faster growth if the outbreak subsides. Either way, the U.S. looks to be less exposed to risks and better positioned to ride them out when they do happen.

Which, if you think about it, points to the same conclusion as the January effect would. Expect volatility, but not a significant pullback here in the U.S. over 2020, with the prospect of better-than-expected growth and returns. And this is not a bad conclusion to reach.

Editor’s Note: The original version of this article appeared on the Independent Market Observer.

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE (Europe, Australasia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices. 

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Please review our Terms of Use.

Fintech

Enjoy thought leadership from some of the most respected, seasoned professionals in the industry.