Should you be worried about your stock portfolio this year? Some “experts” are saying you should be very worried. The reason? According to the Stock Trader’s Almanac “as January goes so does the rest of the year”. Since 1950 the performance of the stock market in January predicts returns for the rest of the year with over a 90% accuracy. This year the market indices were down approximately 3%, this means you should sell all your stocks right?
Not so fast. The good news is the New Orleans Saints won the Super bowl. According to studies when the NFC wins the Super Bowl it is a very bullish signs for stocks. The Super Bowl Predictor as it is called is accurate 85% of the time, nearly as much as the January barometer.
I remember last February having a conversation with a very close colleague of mine. He was a former long-short hedge fund manager in the UK with several billion dollars under management. The markets were tanking nearly every day. Stocks were down 8.6% for January 2009 making it the worst January on record. The economy looked even worse with many economists predicating we were entering a depression.
My colleague predicted since the market was down for the month of January it would be down for the rest of the year. I asked him if he could give me a logical reason to explain this phenomenon. He could not give one reason, but cited decades of data to support his claim. I stated that there was a 50/50 chance the market would be negative for the year. To be honest there might be a slightly higher chance to have negative returns because all the market would have to do is stay even for the market to be negative for the year. However this might explain a January barometer of 55 or 60% but not enough to explain a 90% probability.
I argued that the January barometer is a statistical anomaly and over time it will disappear. Therefore if anything a bad January is a positive sign, since there will be many positive upcoming years when January is negative for the barometer to revert closer to a normal mean of 50/50. In addition, since on average the stock market goes up, there is a higher probability in a given year that the market will go up not down. I am no statician but I would say that if there is a down January there is a 50% plus chance the stock market will have a positive year. My friend lost the bet and the market went up over 25% for 2009. (Of course I reminded my colleague of our bet yesterday, and he claimed to not remember having the conversation!). Anyone who sold out based on the silly January barometer missed out on a massive stock market rally.
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