Now What: A Guide to Retirement During Volatile Times

The January Effect

by ken | 08:12 in |

The January Effect

There’s an old adage you may have heard recently which says: “As goes January, so goes the year.” What is this January barometer all about? According to the Stock Traders Almanac, the month of January tends to predict the direction of the market with an 88.5% accuracy ratio, with only seven major errors recorded since 1950. Those aren’t bad numbers.

What causes the “January effect”? Most sources attribute it to a calendar-related anomaly in the financial markets where security prices increase in the month of January because investors sell losing positions in December and reposition themselves after the first of the year, or vice-versa. While this is certainly not exact science, and it is far too early to know if January will accurately predict the rest of the year, it is interesting to note.

So far, the Bulls are really showing off. With seven trading days left to go in January, the benchmark indexes are all up between 4% and 7%. The S&P 500’s 4.5% YTD gain marks its best start since 1987! So does this bull have legs? Skeptics will tell you it doesn’t and idealists will tell you it does. We’d like to tell you that we don’t know. We’re not clairvoyant. (Sorry, we know you wish we were.) What we do know is that markets don’t move up or down in a straight line, and we won’t be surprised if we experience a pullback in the weeks ahead. This is not something we fear; it’s just the nature of the stock market.

There are both positive and negative factors at work right now, and we are monitoring many of them. Europe is still on the map, and our economy is growing at a slower-than-average rate that leaves it somewhat vulnerable to external shocks. At the same time, we see the strengthening in various sectors such as financials, basic materials, durable goods, and technology as reasons to sustain our optimism that both the stock market and the economy may fare well in 2012.

Tuesday – Redbook
Wednesday – Pending Home Sales Index, EIA Petroleum Status Report, FOMC Meeting Announcement
Thursday – Durable Goods Orders, Jobless Claims, New Home Sales, Leading Indicators
Friday – GDP, Consumer Sentiment

Data as of 1/20/2012 1-Week Since 1/1/2012 1-Year 5-Year 10-Year
Standard & Poor's 500 2.04% 4.59% 2.74% -1.61% 1.67%
DOW 2.40% 4.12% 7.59% 0.25% 3.02%
NASDAQ 2.80% 6.97% 3.05% 2.74% 4.44%
MSCI EAFE 4.70% 4.85% -9.07% -3.98% 2.80%
10-year Treasury Note (Yield Only) 1.85% N/A 3.46% 4.77% 4.89%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

The economy probably grew at its fastest pace in a year and a half during the fourth quarter; a key U.S. report is expected to show. The current MarketWatch forecast of economists predicts 3.0% growth in the fourth quarter, well above the third-quarter level of 1.8%. That would be the fastest pace of growth in a year and a half.

Amid heightened tensions with Iran, an American aircraft carrier has sailed through the Strait of Hormuz into the Persian Gulf. The Navy says it's a routine maneuver. Iran recently suggested it might use military force to close the Strait in retaliation for new international economic sanctions.

The average price for regular gasoline at U.S. filling stations rose 3.48 cents to $3.3944 a gallon last week, according to Lundberg Survey Inc.
Postage rates jumped Sunday for the first time in two and a half years as the U.S. Postal Service hopes to generate more revenue amid historic losses. First-class postage stamps now cost 45 cents each; a price jump that officials anticipate will generate an additional $888 million in annual revenue.

“The glow of one warm thought is to me worth more than money.” – Thomas Jefferson