If the stock market is driven by fear and greed, as the time-worn adage has it, then investors unnerved by its gyrations in early February can reasonably take comfort in some statistically-supported superstition.
Enter the so-called January barometer, the theory that the first month of the year can be used as an indicator of what's in store from February through December. While historical patterns are no guarantee, the indicator has proven reliable 38 of the 40 times since the mid-20th century when the S&P 500 experienced full-year growth, according to Fidelity Investments.
And it has been far more accurate in predicting growth than declines, a trend that bodes well for 2018. Despite a nosedive by the three major indexes in early February, the Dow Jones Industrial Average rose 5.8 percent in January as the broader S&P 500 gained 5.6 percent and the tech-heavy Nasdaq Composite Index climbed 7.4 percent.
While most of those gains were wiped out during a two-day losing streak in early February that pushed the Dow down by 1,175 points, the largest raw-number drop in its history on that basis, “it feels to me like a normal correction in what could be a pretty good year,” Wayne Wicker, who oversees $51 billion in retirement plans for Washington-based ICMA-RC, told the Washington Examiner.
The organization analyzed the market’s overall performance in years since 1950 with a strong start, he said, and found that the top 20 periods generated returns of about 23 percent over a full 12 months.
“While it’s not locked in stone, a strong January bodes well for full-year returns,” Wicker said.
It’s important to note, however, that “it’s not a straight line,” he added.
“Historically, you typically have an opportunity within the year to buy at lower levels than you did on Jan. 1,” Wicker said. Markets tumbled an average of 9.9 percent at some point during the 12-month periods his organization studied.
For more fundamental indicators that markets are likely to remain robust, consider this year's healthy U.S. payroll growth coupled with 14 percent profit gains, on average, at the 60 percent of S&P 500 companies that have reported their fourth-quarter earnings so far.
Corporate America is likely to expand further throughout the year, with profits buoyed by a GOP-led tax overhaul that recently reduced the top business rate to 21 percent from 35 percent and operating costs lowered by President Trump’s pruning of federal regulations.
“At the end of the day, theoretically, share prices ought to be following the trajectory of earnings growth,” Wicker said. “Higher earnings and accelerating growth should bode well.”
In January alone, U.S. employers added 200,000 jobs, more than economists expected, and the jobless rate remained at 4.1 percent, the lowest since the end of Bill Clinton’s presidency.
That, ironically, was likely the cause of the stock-market slide: The U.S. appeared to be growing rapidly enough that traders began speculating the Federal Reserve might raise interests more than the three 25 basis-point hikes it has signaled this year.
Then, once the market’s dive began, it was amplified by programmed trading linked to specific price levels and value fluctuations, Tony Roth, who oversees $83.5 billion in assets for Wilmington Trust, told the Washington Examiner.
Still, “we feel very confident this is nothing more than a selloff,” he said.
Indeed, while rapid economic growth that forced the Fed to make surprise rate hikes in 1994 ultimately trimmed 1.5 percent from the S&P 500, the index roared back the next year, Hans Mikkelsen of Bank of America Merrill Lynch said in a report.
The S&P 500 climbed 34 percent in 1995 and delivered growth of 20 percent in 1996.
“The economy is on a very solid footing right now and will continue to be on a solid footing for at least the next 18 months,” said Wilmington Trust’s Roth. “We don’t see any indication of a recession coming, and consequently, we think that there’s still more upside to stocks.”