Sound Advice: January 6, 2021

 Does January predict the full year?

One of the well-known Wall Street tales is that whatever happens in January is likely to be a good indication of how the rest of the year will be.  In the interest of getting a better understanding of the probabilities, I studied the returns of the Standard & Poor's 500 for the last 50 years.  The results of that study give some assurance that January may point the direction for the months that follow, but the early going is by no means a guarantee of what's to come.

Let's start with the reality that over extended periods of time two out of three years will show positive returns.  So when we look at the span from 1968 to 2017, we learn that (after excluding years that showed gains or losses less than 2%), exactly two out of three years registered significant gains.  That was as expected.

More interesting is the fact that in the years when the January number was positive, three quarters of the time the full-year result was also positive.  In four of the years with an up result for January, the direction over the remainder of the year was down.

At this point, one is tempted to buy in to the reliability of the January indicator.  I suggest that investors take that thought with a grain of salt.  What muddies the waters were the findings of the last 10 years, a decade when January's net pointed the wrong direction four times, most recently in 2016 and 2014.

Beyond the note that may be struck in the opening stanza, there are several realities ahead.  One is that it's quite likely that the new year will bring with it even more volatility than we've recently experienced.  And don’t forget that in almost every year, there has been an interim correction of 10% or so sometime along the way.

This year’s picture is even cloudier.  One has to wonder what lies ahead for the incoming presidential administration, especially so in the wake of what has been continuing post-election chaos.  Will the increasing level of partisanship and rancor lead to a further Congressional stalemate or at some point might we expect that divisiveness will give way to a time when legislators begin to work together?

The answer to that question will be critical to efforts to muzzle the pandemic, address the impact of climate change and focus on grossly overdue infrastructure programs as well as improving education and opportunity universally, not just for a favored few.

Until the focus becomes clearer, uncertainty will linger.  For investors, uncertainty is not a promising vision.

Any questions, please contact me at nrwayne@soundasset.com