Happy Valentine’s Day everyone! With the S&P 500 Index up 9.8% for the year as of yesterday, this is its best start up to this point since 1991. So should investors love to see this much green this early in the year, or should they be leery they might be heartbroken down the road?
An old adage on Wall Street suggests, “As goes January, so goes the year.” With stocks having posted their best January in more than 30 years, it’s time to take a closer look at the January barometer, first discussed in 1972 by Yale Hirsh of the Stock Trader’s Almanac. Simply put, if the first month of the year is green, it bodes well for the rest of the year (and vice versa).
Let’s get one thing straight—this didn’t work last year. The S&P 500 was up more than 5% in January of 2018, and it closed the year in the red. Nonetheless, the January barometer has a strong track record, and one we shouldn’t ignore.
As shown below in the LPL Chart of the Day, the numbers confirm that when the S&P 500 has been green in January, the rest of the year (final 11 months) has been up 11.7% on average, well above the overall average return of 7.6% for the final 11 months of the year. However, when that first month was red, the final 11 months were up only 1.2% on average. According to LPL Research Senior Market Strategist Ryan Detrick, “The January barometer isn’t perfect, but it does have a pretty solid track record. Now where things really get interesting is when that first month was up more than 7% (like in 2019), the return over the final 11 months actually became stronger.”
Of course, we don’t suggest investing based simply on what the first month does, but with a more accommodative Federal Reserve, fiscal policy still flowing, and likely continued better-than-expected corporate earnings growth, this is yet another sign that 2019 may see a continuation of the bull market, as we outlined previously in our Outlook 2019.
In all the instances when the S&P 500 was up more than 7% at the end of January, the rest of the year gained five out of six times, with only 1987 negative. Still, a 10.3% return over the final 11 months implies we’d see new highs before 2019 is over. Last, be open to a pullback, as a median correction of 8.1% has happened in the past after super strong starts to the year.
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