Last year after the market was up about 5% in January, I wrote a newsletter to introduce my clients to the so-called “January Indicator”:
According to research done by Cooper and McConnell, what the market does in January has a strong predictive power for what the market will do for the rest of the year.
Using data since 1940, they found that if the market is up in January, it will rise an additional 14.8% for the rest of the year; if the market is down in January, it will rise only 2.92% for the rest of the year. This gives rise to a spread of almost 12%, a highly statistically significant number.
According to Sam Stovall, chief equity strategist at S&P Capital IQ, the S&P 500 since 1945 has risen 56% of the time following a down January. That is lower than the 84% frequency of February-through-December gains following a higher market in January.
I encouraged my clients to stay invested and to even increase their equity allocation a bit. I was right, 2013 saw a great year in stocks. I’m not psychic or anything it’s just that history tends to repeat itself.
Fast forward to 2014, we watched as the S&P 500 fell 3.5% in January. If we were to use history to frame our outlook for the rest of the year, the odds of a down market from here just increased 3x from 16% to 44% according to Sam Stovall’s research.
Is that a bad thing? I’d like to argue for wealth accumulators in their 30s, 40s and 50s that it’s a great thing should the market fall. They will be able to snap up shares of productive assets at a discount.
How many people regret that they did not snap up shares during the financial crisis in 2008 and 2009? Should a market correction come to pass, don’t make the same mistake again.