Why we expect a positive year, despite a negative January

Market Perspective

January 31, 2022

Key takeaway

  • Despite a down January, our work suggests the likelihood of positive gains for the year remains. The January barometer has been less reliable over recent years, and our analysis shows that the business cycle matters for returns.
  • Moreover, recent depressed investor sentiment readings and the sharp contraction in valuations seen over the past month have tended to be followed by positive market returns on an intermediate basis.
  • Therefore, we still anticipate solid, albeit more modest, gains for markets this year, alongside more normal pullbacks, especially given the transition in monetary policy.

What happened

An old Wall Street adage is, “As January goes, so goes the year.” With the S&P 500 down 7% through Friday — which places its performance as the fourth worst January since 1950 — the January barometer would appear to bode ill for the rest of the year. Since 1950, there have been 29 previous Januaries where the S&P 500 fell. Following these instances, stocks averaged a relatively tepid gain of just 2.7% over the remaining 11 months of the year, and were positive 62% of the time. Conversely, when January was a positive month, the S&P 500 rose an average of 11.9% the rest of the year and posted gains 86% of the time.

Our take

While these are notable stats, the January barometer has been less reliable more recently. Moreover, this indicator should not be viewed in a vacuum. Indeed, after providing a helpful signal in 2008, the S&P 500 has risen in seven straight instances following down Januaries since 2009, with an average rest of the year gain of 18.6%. This includes both 2020 and 2021. Furthermore, the business cycle matters.

  • When isolating the 11 down Januaries which were followed by further losses by year end, seven of those years coincided with recession. Our team’s work continues to suggest near-term recession risk is low, even while we expect first quarter economic growth to be relatively weak given the emergence of the omicron variant.
  • If we exclude these seven recessionary years from the study, the S&P 500 rose in 18 out of 22 instances, or 82% of the time, following down Januaries, with returns for the rest of the year averaging 8.6%.

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