So far in 2018, the January barometer suggests that markets will close the year higher than when they began the year. (Canadians have, of course, a special reason to be leery of a ‘Barometer Rising’, the title of Hugh MacLennan’s novel set in a bustling Halifax before the December, 1917, explosion.)
A recurring pattern that has been used to predict stock market performance in the past is the so-called ‘January barometer’. While such patterns may serve as useful indicators, they’re no substitute for a long-term investment plan.
Simply put, the January barometer is a phenomenon that gives a strong indication of what may occur during the next 11 months. As January goes, so does the year. If markets are up in January, therefore, you would expect them to rise for the remainder of the year. If markets decline, however, you would expect the opposite.
According to one source we looked at, the January barometer has had a 90-per-cent success rate, as measured by the S&P 500, since 1950. Fidelity Investments, however, argues that down markets in January have not reliably predicted a weak overall performance for the year. But the fund company does agree the January barometer has a strong success rate when the market rises. In fact, it has found that in 37 of 39 years since 1950, an up January predicted an up year for the S&P 500.
Only in two years did Fidelity find that stocks dropped sharply (defined as a drop of more than 10 per cent) after an up January. These years were 1966 and 2001, at the end of strong multi-year advances.
Another January sign
Another version of the January indicator, which has a somewhat less impressive track record, focuses on the first five trading days of January. Once again, the market’s performance during this period should presage its direction for the year.
If one believes this indicator, the S&P 500 is in for another good year in 2018. After all, in the first five trading days of January, the index gained 2.9 per cent. In Canada, the S&P/TSX Composite Index rose 0.7 per cent over the same time.
Turning back to the January barometer, the S&P 500 is up around six per cent as the month winds down. This year, then, the January barometer would indicate an up year for the market.
Other factors, too, support the notion that 2018 should be a good year for stock markets in general. First of all, the bulls seem firmly in charge of these markets. Despite the fact that many areas of the market are pricey, stocks can remain so over extended periods. In fact, bull markets are rarely reversed by their advanced age or high stock valuations. Instead, they’re usually brought to an end by deteriorating economic fundamentals or faltering corporate profits. And neither of these factors is occurring at this time.
So, even while we think caution is warranted due partly to high stock valuations, the bull market may have a way to go before it is overcome by the bears.
But whatever 2018 brings, we think market predictions based on theories such as the January barometer should not deter you from following a sound, long-term investment strategy. Such a strategy consists of maintaining a balanced and diversified portfolio, not acting on short-term portents. In the end, a long-term investment plan cuts risk and increases profits over the long term.
Corporate profits & NAFTA
As we said above, one thing that can derail a bull market is faltering corporate profits. But that would hardly seem to be a threat right now. In fact, as companies begin to report their fourth-quarter financial results, estimates suggest that end-of-the-year profits are set to rise by double-digits both north and south of the border. In fact, Canadian profits are expected to rise more strongly than is the case in the US. Thomson Reuters has called for profits on the S&P/TSX Composite to rise 14.1 per cent, versus growth of 12.4 per cent for the S&P 500.
While this bodes well for the Canadian market, it doesn’t follow that domestic equities will catch up to their stronger-performing US counterparts anytime soon. That’s because NAFTA fears have weighed on Canadian stocks recently, and they threaten to overshadow good news on the profit front for now. That’s yet another reason to be cautious about the current bull market.
This is an edited version of an article that was originally published for subscribers in the February 2, 2018, 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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