Market Overview

What Will January Tell Us About Stocks This Year?

What Will January Tell Us About Stocks This Year?

There are six trading sessions left in January, and it's time to see if the January Barometer is telling us where where the market is headed in 2014.

This January has increasingly been a struggle, and that's not a good sign for markets. If you're bullishly inclined, the best one can say is maybe the market will gain a little. Certainly that's what Wall Street expects.

The barometer, according to the Stock Trader's Almanac, posits the stock market's January performance offers a pretty good signal on what's to come. If January is a good month, the year is good. If it's lousy, the year is terrible.

In January 2013, the Dow Jones Industrial Average jumped 5.77 percent, with the Standing & Poor's 500 Index up 5 percent and Nasdaq Composite Index up 4.1 percent. At Dec. 31, the Dow was up 26.5 percent, while the S&P 500 rose 29.6 percent. The Nasdaq soared 28.3 percent.

In January 2008, the Dow fell 4.6 percent. The S&P 500 dropped 6.1 percent, and the Nasdaq slumped 9.9 percent. We all know what happened next: the worst year for stocks since the Great Depression. The crash pushed the Dow down 33.8 percent for the year. The S&P 500 dropped 38.5 percent, and the Nasdaq tumbled 40.5 percent.

While the barometer has been right nearly 76 percent of the time since 1950, it isn't perfect.

In January 2009, the Dow and S&P 500 fell more than 8 percent; the Nasdaq dropped 6.4 percent. But the market bottomed in early March, with the major averages all down 25 percent. Notice the word, "bottomed," however. On March 10, the post-crash rally erupted. The Dow ended the year up 18.8 percent. The S&P 500 had risen 23.5 percent, and the Nasdaq soared 43.4 percent.

Here's why there's concern about 2014. At Thursday's close, the Dow was down 2.3 percent for the month, with the S&P 500 off 1.1 percent. The Nasdaq, however, is up 1 percent. The fact is, the market has been struggling with two headwinds:

  • The great 2013 performance, which will be tough to beat. Plus, the market has risen at least four of the last five years.
  • The mediocre data on the economy and the holiday shopping season, and subpar results in the early fourth-quarter earnings season. In addition, there are global worries. China is struggling to keep its banking system liquid.

Related: How to Invest Like Peter Lynch

Best Buy (NYSE: BBY) is the poster child for disappointment. The company warned on Jan. 16 that its holiday sales were weak. The stock fell 35 percent in two days. But Intel (NASDAQ: INTC), IBM (NYSE: IBM), Advanced Micro Devices (NYSE: AMD) and Coach (NYSE: COH) are among the big disappointments.

But Netflix (NASDAQ: NFLX) beat all the Wall Street estimates handily with its fourth-quarter results, released late Wednesday, and the stock jumped 16.5 percent on Thursday.

So let's say the Dow, S&P 500 and Nasdaq all end lower for the month. The barometer's history suggests a sell-off might be coming some time before the end of the year. The market may recover afterward, but you still don't know.

The major averages did slump in January 2010, suggesting a bad year overall, but the Federal Reserve set off a recovery when it instituted its second big bond-buying program.

Another point: It is rare the U.S. stock market doesn't fall up to 10 percent briefly during any given year. 2013 was one of those rare years. More typical is 2011, when budget battles and a U.S. debt downgrade caused the Dow, S&P 500 and Nasdaq to fall as much 16 percent between the end of June and early October.

But the market came back -- because the Fed said it would do everything it could to ensure the economy could function relatively smoothly.

One shouldn't take the January Barometer too seriously. As noted, it's not perfect. Second, January is part of the best six months of any 12-month period -- November through April. Third, a lot of money typically comes into stocks in January. 

And lastly, if you're a buyer of stocks, it's the company that's important, not the market. Legendary investor Peter Lynch would advise not obsessing about the market overall.

That said, we'll remind you of another indicator coming up: the Super Bowl indicator. That says the market rises if an original member of the National Football League wins the game. It falls if an original member of the American Football League wins.

Fact is, it really is a totally coincidental, totally random signal.

The Denver Broncos are an original AFL team. The Seattle Seahawks are an expansion team. Two expansion teams that have won a Super Bowl were the Baltimore Ravens in 2001 and 2013 and the Tampa Bay Buccaneers in 2003.

The Broncos lost four Super Bowls before winning in 1998 and 1998. Fact is, every time Denver appears, the market has finished the year flat or higher. The Seahawks appeared in 2006. The market had a strong year.

The market fell badly in 2001 when the Ravens won, even though the January Barometer suggested a good year.

There was a recession going on, however, and the market reeled in the aftermath of the Sept. 11, 2001 terror attacks. Stocks rose last year. Stocks had a huge rally in 2003 after Tampa Bay's win over the Oakland Raiders -- an original AFL team.

Just having Denver get to the game may be good for stocks. Or not. 

The January Effect: Tthe S&P 500's January and Annual performances Since 2000
      End-of-month close     Chg. For month     Chg. For year
2014     1,828.46     -1.08%     ?
2013     1,498.11     5.04%     29.60%
2012     1,312.41     2.04%     13.41%
2011     1,286.12     2.26%     0.00%
2010     1,073.87     -3.70%     12.78%
2009     825.88     -8.57%     23.45%
2008     1,378.55     -6.12%     -38.49%
2007     1,438.24     1.41%     -3.82%
2006     1,280.08     2.55%     13.62%
2005     1,181.27     -2.53%     3.00%
2004     1,131.13     1.73%     8.99%
2003     855.70     -2.74%     26.38%
2002     1,130.20     -1.56%     -23.37%
2001     1,366.01     3.46%     -13.04%
2000     1,394.46     -5.09%     -10.14%
2014 data is as of Jan. 23.

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