Published in the February 17 – March 1, 2016 issue of Morgan Hill Life
By Dan Newquist
Dan Newquist
“As goes January, so goes the year,” is a popular axiom that investors use to point out that the first month of a year has a good deal of influence over the rest of the year. Given that the U.S. stock market (i.e., S&P 500 Index) was down 5 percent in January, many wonder “will this be a bad year for stock investors?”
Let’s look at some of the historical performance of this axiom and see if it is a valid claim. In 2014 and 2015, the U.S. stock market lost more than 3 percent in January in each year. However, in both cases, the stock market recovered and ended the calendar year up 13.7 percent in 2014 and 1.4 percent in 2015 (source: Standard & Poor’s). So, the last two years went against the popular saying.
Looking back longer term, the results vary. Reviewing S&P 500 Index performance data from 1927 to 2015, we can see that stocks posted positive calendar gains 73 percent of the time and was down 27 percent of the time. Given these values, stocks have been positive more often than they have been negative when measured by calendar years.
Interestingly, in years where the January return for the stock market was positive, the calendar year return was positive 85.4 percent of the time. This statistic is fairly supportive of the idea that January’s return will dictate the calendar year return. It is both a fairly high percentage in absolute terms and also an improvement on the historical probability of a calendar year being positive.
And there is appears to be some truth to this saying when the market declines in January. When stocks experience a negative return in January, they finished the year in negative territory 47.1 percent of the time. While the final result is essentially a coin toss, it is a higher probability than the 27 percent of the time the markets have historically lost money in a calendar year.
There seems to be some credence to the “As goes January…” axiom, but it surely isn’t a rule we can count on. However, keep in mind that every year is different and the news of the day truly changes. Yet, if anything stands out from this analysis, it is that stocks have a strong tendency (i.e., almost three out of four years) to go up over time. It certainly isn’t a guarantee, but stocks increase in price because corporations are in business to grow. In most years, a company will grow its revenue and profits. A company that is generating more profits now versus the past is typically worth more than it was before.
If 2014 and 2015 are any indications, it is hard to get behind this axiom. Will this be the year that it holds true? I don’t know (and no one does), but, just because January was negative, it doesn’t mean that we should abandon the long-term strategies we have in place for our portfolios. If you are nervous or anxious, now is the time to meet with your advisor and discuss your personal financial situation.
DAN NEWQUIST, CFP®, AIF® is a Principal Investment Advisor Representative with RNP Advisory Services, Inc., a registered investment advisor, in Morgan Hill. He can be reached at 408-779-0699 or [email protected]. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.
