There's a tradition of prominence given to Wall Street adages.
"You won't go broke taking profits."
"Cut your losses, let your profits run."
"Sell in May and go away."
"The trend is your friend."
Following the dismal performance of the equity markets in January, one adage getting attention lately is, "As goes January, so goes the year." But is it true? Do equity markets generally produce negative results for the remainder of the year following a down January? There's certainly plenty of interest following this January's -3.46% decline of the S&P 500 Index.
The answer depends, to some extent, upon the period you sample. For example, over the last 20 years, when the S&P 500 was down in January, its return from February through December was 4% on average. However, looking back over 60 years, the S&P 500's average nominal return from February to December during a down-January year drops close to 0%. All-in-all, the saying doesn't quite live up to its billing, but it does generally herald lower returns on equities for the subsequent 11 months in the calendar year.
The market also tends to discount the strength or weakness of anticipated economic activity, and some negative Januarys were indicators of weak (or negative) growth during the year. In periods preceding a recession or near-recession, when January's S&P 500 return was negative, February through December followed suit. Excluding these periods does improve the data a touch:
Period |
Average S&P 500 Returns February to December |
Average S&P 500 Returns February to December excluding years preceding recessions and near-recessions |
1994 – 2013 (20 years) |
3.69% |
5.19% |
1984 – 2013 (30 years) |
3.51% |
4.49% |
1974 – 2013 (40 years) |
1.22% |
2.24% |
1954 – 2013 (60 years) |
0.17% |
0.93% |
1944 – 2013 (70 years) |
0.06% |
1.06% |
This is important if you hold a positive view of the state of the US economy (as many currently do).
Another interesting detail is the improvement of average annual S&P 500 returns following a negative January in the more recent history of the US equity markets. Nevertheless, the general bias is for a negative January to herald lower returns than when the month is positive:
S&P 500 Index Returns: 1984 to 2013 (30 Years) |
||
Average Returns |
February to December |
Year |
When January is Negative |
3.51% |
-0.71% |
When January is Positive |
10.84% |
15.11% |
Difference |
7.33% |
15.82% |
Median Returns |
February to December |
Year |
When January is Negative |
4.01% |
2.20% |
When January is Positive |
12.57% |
14.12% |
Difference |
8.56% |
11.92% |
One last thing to note is that there is a higher incidence of negative returns from February through December, and for the year as a whole, during years when January is negative versus years when January is positive.
S&P 500 Index Returns: 1984 to 2013 (30 Years) |
|||
January |
Feb. to Dec. |
Year |
|
Number of Negative Return Periods |
10 |
7 |
7 |
Frequency of Negative Return Periods |
33% |
23% |
23% |
Number of Coincident Negative Return Periods (when January was negative) |
3 |
4 |
|
Frequency of Coincident Negative Return Periods (when January was negative) |
30% |
40% |
The bottom line for investors is that a negative January tends to herald lower (though not necessarily negative) returns for the subsequent 11 months.
Copyright 2014 Saturna Capital Corporation and/or its affiliates. All rights reserved. Vol. 8 · No. 2
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