It hasn’t been a good first month for stocks.
As of this morning’s market open, the S&P 500 is down more than 3.5% in January. Ordinarily a 3.5% pullback would be no cause for concern – especially considering that stocks entered the month near all-time highs. But history tells us that January is different.
Yale Hirsch of the “Stock Trader’s Almanac” devised a theory more than 40 years ago that how January goes, so goes the stock market that year. Dubbed the “January Barometer,” Hirsch’s theory is remarkably accurate. Since 1950, the January Barometer (not to be confused with the “January Effect,” which my colleague Andy Crowder wrote about earlier this month) has predicted the direction of the S&P 500 in a given year with 89% accuracy.
Only seven times in 64 years has the January Barometer significantly missed the mark. It has been dead on each of the last two years.
That brings us back to this morning. With only two trading days left in January, it would take a major rally today and tomorrow for this not to be a down month for the S&P. Chances are that won’t happen.
So, with the market headed for a down January, does that mean stocks in 2014 are doomed? Not necessarily.
For starters, the January Barometer has only registered seven major errors since 1950. It’s been wrong other times, too. Hirsch assigned the theory a margin of error of +/-5%. That’s why 2011 doesn’t count against the January Barometer’s misses, even though stocks finished flat in a year in which the S&P was up 2.3% in January.
When you factor in the “minor” misses, the January Barometer’s accuracy dips to 76.2%. That’s still high – but not the virtual sure thing that an 89% accuracy rate for major errors represents.
Also, two of the seven “major” errors have occurred in the last five years. In 2009, stocks fell 8.6% in January. But the post-recession recovery got underway shortly thereafter and the S&P 500 finished the year up 23.5%.
2010 got off to a similarly inauspicious start. Stocks fell 3.7% in January, only to bounce back and finish the year up 12.8% thanks in large part to the Federal Reserve’s enactment of QE2 – a second round of quantitative easing.
In light of those recent misses, a down January isn’t an automatic death sentence for stocks in 2014. Things can change through the course of a year. Just look at how much the tone on Wall Street has changed from December to January.
2013 was the best year for stocks since 1997. Since the calendar has flipped to 2014, however, stocks have struggled. Is it the sign of a long-expected correction? Or is it the latest in a string of false alarms – mini pullbacks that last little more than a month?
If you believe the January Barometer, it’s the former. Let’s hope the Barometer is wrong this year.
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