The January barometer gave a mixed outlook for 2020. An interesting indicator, perhaps, but we think you’re better off putting time into developing a long-term investment plan.
A recurring pattern that has been used to predict the stock market’s performance in the past is the so-called ‘January Barometer’. While such patterns may serve as useful indicators, they’re no substitute for a sound long-term investment plan.
Simply put, the January Barometer is a phenomenon which gives an indication of what may occur during the next 11 months. The maxim holds that: “As January goes, so goes the year.” That is, if markets are up in January, you would expect them to rise for the remainder of the year. If markets decline, however, you would expect the opposite.
Since 1950, the January Barometer has had a good record at predicting the course of the S&P 500 (the Standard & Poor’s 500-stock index). During this time period, whenever the S&P 500 moved up or down in January, the index did likewise for the balance of the year, most of the time.
Only one indicator is positive for 2020
Another version of the January Barometer focuses on the first five trading days of the year. Once again, the market’s performance during this period has come to be regarded as a harbinger for the year. This version is viewed as an ‘early-warning indicator’.
Consider the first five trading days of 2020. The S&P 500 ended 2019 at 3,230.78. By January 7, five trading days into 2020, the index closed at 3,246.28. The early-warning indicator suggests that stock prices in 2020 will end up higher than at the end of last year. By January 31, however, the S&P 500 had slipped to 3,225.52. The economic consequences of the coronovirus suggest a down year for the market.
Alas, when it comes to the Toronto Stock Exchange, the January Barometer has had less success in predicting of the market’s trend.
No matter what the January Barometer says, it’s best not to let such portents dictate your investment strategy. After all, there are problems that can hurt the market: the spread of the coronovirus beyond China; the 2020 US presidential election; a big federal deficit and high company debt in the US; Brexit negotiations; and a slowdown in European and Chinese economic growth. Then again, the stock market is well known to ‘climb a wall of worries’.
Remember, too, that the January Barometer may merely reflect what’s known as ‘data mining’. That is, if you look for recurring patterns hard enough, you’ll find them even if they have no validity. It’s similar to asking all the people in a stadium to flip a coin. Even after 10 flips, at least a few will have come up heads or tails 10 times in a row.
The January Barometer was up. But whatever 2020 brings, you should not base your investment strategies on ideas such as the January Barometer. Instead, devise a sound investment plan. Such a plan should consist of keeping a balanced and diversified portfolio, buying gradually and mostly sticking with high-quality stocks. These measures should help reduce your risk and raise your profits over time.
This is an edited version of an article that was originally published for subscribers in the February 7, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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