By: Carter E. Anthony, CFA
As January goes, so goes the market according to The Stock Trader’s Almanac.
Since 1945, 75% of the time when January experienced market growth the stock market ended the year on a positive note.
On the other hand, a down January has not been a reliable indicator of a weak market for the year.
Ignoring “The January Effect” since 1945 the market has experienced a loss in only 17 of the 74 years recorded. If earnings are good the market has a natural upward bias.
In addition to “The January Effect” there is also “The First 5 Trading Days in January Effect” which says the first five trading days of the year will indicate the direction of the stock market for the full year.
Some if not most of the first five days effect can be explained by investors buying back in to cover empty positions created by tax loss selling at the end of the previous year.
So what happened in January, 2020? The first five trading days of 2020 produced a 1.4% gain in the market pointing toward a positive year in 2020.
In 2019, the first five trading days in January produced a 2.7% gain leading to a 20%+ return in the market for the year.
As we moved further into January 2020, tariff negotiations, political divisiveness, the impeachment hearings and the coronavirus all took their toll on investors’ emotions.
The stock market finished January down 1%. However, February has seen less fear among investors and the market is up 3% year to date.
“The January Effect” and “The First 5 Trading Days in January Effect” are not always reliable but more so than not.
Rich Ross, the Technical Analyst for EvercoreISI, points to low bond yields, low inflation, low growth, low crude prices, a firm dollar and persistent skepticism among investors as the ingredients for a continued good stock market.
Growth over Value, stay with Tech, underweight Energy. Rich’s target is “20 in 20” (20% returns in 2020).
Most Wall Street analysts predict low to mid-double digit returns in 2020, a little more conservative outlook than in 2019.
“If everybody is thinking alike, then somebody is not thinking.” (A Contrarian’s Opinion)
General George S. Patton, Jr. (U.S. Army Field Commander, WW II, 1885-1945)