February 2nd Weekly Market Update

The stock market declined in January 2015, causing some to ask whether the so-called January effect (or what some call the January barometer) means that stocks will fall this year. One of the best known Wall Street adages, “as January goes, so goes the year,” has a good track record when January is positive, but it is mixed otherwise. Although we always put fundamentals first in trying to forecast market direction, in this commentary we look at January market patterns and posit that the January dip may not be a reason to fret about the stock market in 2015.

The so-called January effect, or January barometer, has a strong track record in that positive Januaries for the S&P 500 have preceded positive years 90% of the time since 1950, with an average calendar year gain of 16.9%. In addition, the average calendar year gain in the S&P 500 when January is positive far exceeds the average move during years when stocks fall in January (-3.4%). But the indicator’s batting average following down Januaries — such as we just experienced — is mixed over the past six-plus decades. A January stock market decline has preceded a down year just 56% of the time — not much different than a coin flip. More recently, during the past 10 years, this pattern has only held 50% of the time, including failures during 2009, 2010, and, importantly, 2014, when the S&P 500 was down in January and finished firmly positive by year-end.

The S&P 500 also fell in December 2014. So what does a down December and January mean for the stock market? The results are similar. While the S&P 500 is marginally lower, on average, for a calendar year when the preceding December and January of that year are both negative, the batting average in the eight occurrences since 1950 is just 50%.