How Do The Stats Stack Up??

(originally published on January 12, 2008)

Technorati Tags: statistics,January barometer,Hooper indicator,election year

 

Old timers on Wall Street would probably have come across market historian Yale Hirsch's phrase, 'as goes January, so goes rest of the year'. Statistics seem to back up this catchy slogan. In 46 of the past 58 years since 1950, the S&P 500's year-end finish mirrored how it fared in the first month of the year. Even in 2007, stocks gained a modest 1.4% in January, with the year end tally being up 3.5%. Every down January on the S&P since 1950 without exception preceded a new or extended bear market, or a flat year. According to research done by Sam Stowall, S&P's chief investment strategist, a hypothetical portfolio of the 10 best-performing S&P industries in January has beaten the overall S&P 500 in the remaining 11 months of the year 75 percent of the time since 1970.

 

 

Lucien Hooper, a Forbes columnist, noted back in the 1970s that whenever the Dow Jones Industrials broke below its December closing low in the first quarter of the next year, it frequently acted as an excellent warning sign for more trouble ahead. All but one of the 27 such instances since 1952 has witnessed further declines, with the Dow falling an additional 10.5% on average. Only three significant drops occurred when the December low was not breached in Q1 (1974, 1981, 1987).

 

 

Quirky market indicators need to necessarily be taken with a fistful of salt. Nevertheless there is no denying that a weak January becomes a psychological negative that weighs on stocks for the rest of the year. Events in January tend to set up things for the rest of the year. It is an uphill battle akin to a football team falling behind by two touchdowns in the first quarter of the Super Bowl. By that token, the statistics shown above seem formidable. However, there is one statistic in favor of bulls that deserves a mention. Since 1949, election years have been lopsidedly bullish with an average gain of 9.3% and only two negative years (1960 and 2000). It will be interesting to see how this election year shapes up.