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Where do we go from here? Stock market indicators

BY CARTER E. ANTHONY, CFA

 

As we enter the New Year, stock market investors want to know what to expect from the market.

Predictions are a dime a dozen depending upon who you ask. Having quoted Yogi Berra’s statement “It is difficult to make predictions, especially about the future” here many times I seldom throw out any of my own but there are plenty of other predictions to lean on.

The first to look at in the New Year is the market return during the first five days of trading in January.

It is widely believed that the first five days of the year will indicate the market direction for the rest of the year.

While this is highly touted, it is highly inaccurate. In fact, since 1970, yearly market returns have been positive more often than negative when the first five days are negative. The first five days of trading in January 2024, were negative so we shall see.

Then there is the “January Effect” in which the return in January is supposed to predict the return for the full year.

Since 1973, 53% of the time when the market rose in January, it had a positive return for the year.

Fifty-three percent of the time is close to a “50-50” chance. A better feeling comes when the market rises more than 1% in January, it has averaged a 16.8% return for the year.

In January, 2024, the Dow rose 1.3%, the S & P 500 rose 1.7% and the NDQ rose 1.0%.  The rationale behind the January effect is that investors sell stocks in December for tax purposes and reinvest the proceeds in January. The “January Effect” in 2024 indicates another good year.

An eye-popping indicator is the correlation between ladies’ skirts and the stock market. In surveys that have been run since the 1920s, the length of ladies’ skirts and stock market returns have been perfectly correlated.

The roaring 20s and short flapper skirts; the Depression and hidden knees. Who can forget the roaring 1960s, mini-skirts and hot-pants; a flat-to-down market in the 1970s and long skirts.

As the market goes up, so do hemlines; as the market goes down, so do hemlines. There is no trendline today, some skirts are short, some skirts are long.

The ”Super Bowl Effect” contended that if a legacy NFC team wins, the market will go up. If a legacy AFC team wins, the market will go down. From its beginning in 1978, it had some validity. It is still talked about but it has little following today.

What about those smart guys on Wall Street, the ones who make the big bucks, wear the thousands of dollars suits, light their cigars with $100 bills and enjoy 3-martini lunches?

Their long-term historical record is average at best. Their prediction for 2024 is that earnings will improve over 2023 driving the market up 8%-9%, slightly less than its long-term return of 10%.  A plain vanilla prediction, no conviction.

Maybe the best predictor is the one that follows the Presidential Cycle. Election years are typically bullish.

Pre-election years are the best of the four year cycle. 2023 was excellent with all three major indices beating their average annual return.

Since 1949, when an incumbent has run the average return for the year has averaged 12.8%. When the incumbent wins, there is less uncertainty and the return is better than when the challenger wins.

To take it to the bottom line, my 96-year-old friend Billy Ray, retired Chief Investment Officer of Liberty National Life Insurance Company, who has survived many investment challenges has always said, “The market will go up and the market will go down.  The best investment policy is to be invested in good companies and let them work for you”.

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