It is inevitable that around this time of year, investors ponder what the year may hold in store for the markets.
While we present many drivers in our Outlook 2013 that will combine to define the path of least resistance for the markets to follow in 2013, the interrelationships between economics, fiscal and monetary policy, geopolitics and corporate actions can seem complex.
Investors can feel overwhelmed and seek a simple answer.
When people feel there is a situation that is out of their control or that it is too complicated to analyse, they often fall back on rules of thumb to make decisions.
But when enough of us rely on them, it can have real repercussions.
We do not place much value on market clichés like the “January Effect” or the “Super Bowl indicator,” but we are often asked about them during this time of the year.
Jittery investors are looking for more reasons to continue selling stocks, measured by domestic stock mutual fund net outflows tracked by the Investment Company Institute (ICI), despite the gains in recent months and years. Were these indicators to turn negative, selling by nervous market participants might push stocks lower.
However, on balance, these time-worn axioms support our outlook for a modest gain for stocks in 2013.
- First five days of the year – This popular piece of market folklore says that the direction of the stock market during the first five days of the year determines whether the market will be up or down for the year. The support for this indicator comes from the fact that of the 40 times the first five days of January have posted a net gain since 1950, 36 were followed by full year gains for the S&P 500 — at first glance a 90% accuracy level. How significant is that? Not very. Here are a three things to keep in mind:
1. The S&P 500 has posted a gain for the year more than 70% of the time, no matter what the first five days have done.
2. A decline in the first five days has been only about 50% accurate at predicting a down year.
3. The most recent exception was in 2011, when stocks posted gains in the first five days, as measured by the S&P 500 index, but the index was down just slightly for the year. Other notable exceptions in recent years include: 2007, when stocks were down for the first five days, but posted a modest gain for the year, and 2002, when stocks posted a gain for the first five days only to end up with one of the worst years on record.
That said, the 2.2% gain in this year’s first five days may be encouraging for investors looking for an early indicator of how the market will fare throughout the rest of the year.
- January Effect – As January goes, so goes the year according to this market adage. It is true that January has more consistently indicated the direction of the stock market for the year than any other month, and when January was positive for the S&P 500, the year as a whole ended with a gain 90% of the time since 1950. Again, this sounds impressive, but when January was negative, the year suffered a loss just a little over 50% of the time. Nevertheless, the modest gain so far for the barely half-over month of January may be encouraging to some.
- December Low indicator – If the Dow Jones Industrial Average (DJIA) in the first quarter moves below the low set in December, the stock market is likely to suffer for the year. Much like the two indicators above, this appears to work well until you look at how often the market finished the year down when the December 2012 low was broken — about half the time. Regardless, the DJIA is 4 – 5% above the December low of 12,938, providing some buffer against this indicator, turning some investors more cautious.
- Super Bowl indicator – The Super Bowl indicator claims that the DJIA goes up for the year as a whole when the winner comes from the original National Football League, but when an original American Football League or expansion team wins, the DJIA falls. Going into the 1998 Super Bowl when the underdog Denver Broncos defeated the Green Bay Packers, the Super Bowl indicator had been correct in 28 of 31 years. However, since 1998, the Super Bowl indicator has had a poor record; it has only been correct about 50% of the time. The most notable failure was the New York Giants’ upset win in 2008 over the New England Patriots, which was supposed to bring about a bull run for stocks — instead the Dow plunged that year as the financial crisis took hold. Last year’s replay of the 2008 contest successfully predicted gains for stocks in 2012. This year’s matchup on February 3 will likely be widely watched, but not for its forecasting ability.
- Chinese Lunar New Year – 2013 is the year of the snake. A look back at average annual stock market returns from 1950 by zodiac sign shows us that the year of the snake has been the worst performing and one of only two zodiac years with negative returns. Unfortunately, this year’s animal has not been lucky for investors [Figure 1].
Figure 1: Chinese Zodiac Points to Losses in 2013
Average Annual Change in S&P 500 Index by Zodiac Sign
Photo: LPL Financial
Source: LPL Financial, Bloomberg data 01/14/13
Of course, there are many more of these indicators we could mention. But you get the idea. The enduring popularity of these strategies for investment decision making — despite their history of merely coin-flip accuracy when examined closely — is a testament to a desire for an easy answer to how to invest in today’s interconnected and complex markets.
For investors looking for simple and tangible indicators of growth in the economy and markets they are better served to look at other offbeat, yet more meaningful, indicators that we put more stock in which include things like: rail freight traffic, mortgage applications, hotel revenue per room, coal prices, business loan demand, bulk cargo shipping vessel costs, and recreational vehicle sales. All of which have been pointing to continued, though sluggish, growth.
Call out: We put more stock in indicators such as rail freight traffic, mortgage applications, hotel revenue per room, coal prices, business loan demand, bulk cargo shipping vessel costs, and recreational vehicle sales.