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As Goes January, So Goes the Stock Market for the Year

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One time-tested adage on Wall Street holds that “As Goes January, So Goes the Year,” meaning that if the market goes up in January, it will continue to rise for the rest of the year, and vice versa.

S&P’s Sam Stovall still believes this adage has merit, particularly when predicting positive full-year performances.

Since 1945, he notes, whenever the S&P 500 advanced in price in January, it continued to rise an average 11.6% during the remaining 11 months of the year. That’s substantially higher than the average 7.2% price gain for the “500” during all 11- month periods since World War II. Finally, this early upward “directional signal” was correct 85% of the time.

But the strategist recently took this idea one step further: he wanted to see whether January could also prove a good predictor of year-ahead performances for sectors and sub-industries in the S&P 500. The answer, he says, is “Yes.”

The idea is a simple one: just select the three S&P 500 sectors, or 10 sub-industries, that posted the best performances during January and hold them for a year.

As the chart below shows, since 1970, the S&P 500 posted a 12-month (January 31 to January 31) average price change of 8.2%. The 10 sub-industries in the S&P 500 that recorded the highest price performances in the month of January, went on to record an average 17.6% price appreciation in the following 12 months. The 10 sub-industries that recorded the lowest price performances in January continued their laggard ways in the year ahead, by registering an average annual gain of 5.8%.

Sector performance results – for both the best and worst performers in January – were consistent with the results for the best and worst performing sub-industries.

Of course, as Stovall likes to remind us, history serves as guide, but never as gospel. What worked in the past may not always work in the future. However, the long-term consistency of these portfolios remain encouraging, in his view.

So, what would a January Barometer portfolio look like for this year? Here is your data:

POSITION:  No positions in stocks mentioned.