The concept behind the previous adage “as goes January, so goes the yr” is that this: if the market closes up in January, it is going to be yr; if the market closes down in January, it is going to be a nasty yr. Actually, it is among the extra dependable of the market saws, having been proper virtually 9 occasions out of 10 since 1950. Final yr, January noticed beneficial properties of seven.9 p.c for the S&P 500 (the perfect January since 1987), predicting an excellent yr. Certainly, that’s simply what we bought.
Actually, even when this indicator has missed, it has often offered some helpful perception into market efficiency through the yr. In 2018, for instance, the January impact predicted a robust market. And it was robust—till we bought the worst December since 1931 and the markets pulled again right into a loss, solely to get well instantly and resume the upward climb. Improper in response to the calendar, proper over a barely longer interval.
Wall Avenue “Knowledge”?
I’m typically skeptical of this type of Wall Avenue knowledge, however right here there may be not less than a believable basis. January is when buyers largely reposition their portfolios after year-end, when beneficial properties and efficiency for the prior yr are booked. So, the market outcomes actually do replicate how buyers, as a gaggle, are seeing the approaching yr. As investing outcomes are decided in important half by investor expectations, January can develop into a self-fulfilling prophecy, which is why this indicator is value taking a look at.
So, what does this indicator imply for this yr? First, U.S. outperformance—and the outperformance of tech and progress shares—is more likely to proceed. Rising markets had been down by virtually 5 p.c in January, and international developed markets had been down by greater than 2 p.c. U.S. markets, in contrast, had been down by lower than 1 p.c for the Dow and by solely 4 bps for the S&P 500, and the Nasdaq was up by simply over 2 p.c. In the event you consider on this indicator, then keep the course and deal with U.S. tech, as that’s what will outperform in 2020.
The issue with that line of pondering is that what drove this month’s outcomes was a traditional outlier occasion: the coronavirus. This virus, or extra precisely the measures taken by governments to regulate its unfold, has considerably slowed the economies of a number of rising markets immediately (China and most of Southeast Asia), and it’s beginning to gradual the developed markets by way of provide chain results. The U.S., with a comparatively small a part of its provide chains affected up to now and with minimal direct results, has not been as uncovered—however that pattern may not proceed.
In different phrases, what the January impact is telling us this time probably has rather more to do with the specifics of the viral outbreak than with the worldwide financial system or markets—and will due to this fact be much less dependable than previously.
The Actual Takeaway
What we are able to take away, nonetheless, is that within the face of an sudden and probably important danger, the U.S. financial system and markets proceed to be fairly resilient. That resilience will assist if the outbreak will get worse, and it’ll level to quicker progress if the outbreak subsides. Both means, the U.S. appears to be much less uncovered to dangers and higher positioned to journey them out after they do occur.
Which, if you concentrate on it, factors to the identical conclusion because the January impact would. Count on volatility, however not a major pullback right here within the U.S. over 2020, with the prospect of better-than-expected progress and returns. And this isn’t a nasty conclusion to succeed in.
Editor’s Notice: The authentic model of this text appeared on the Impartial Market Observer.