What Tuesday's Huge Market Rally Means For All Of 2012

Investors are jubilant this afternoon as the Dow and S&P 500 continue their march higher. They have been joined by a number of economists who predict the major exchanges will appreciate in 2012 — perhaps after a difficult first half.

A look at historical returns should ground these same investors.

Business Insider compiled the first day returns on the Dow since 1912 (x-axis), and compared the results to how the index ultimately performed over the subsequent year (y-axis).

Below are those first day’s returns against the year. There’s almost no relationship between first-day performance and full-year performance.


Photo: Chart: Eric Platt/Business Insider, Data: Bloomberg

Although the data conforms somewhat positively, there is little correlation — pulling an R square, or coefficient of determination, of 0.0145 while the statistical P-value holds an elevated level of 0.235.

Keeping the data to points that moved at the same level as today’s 1.47% gain (or for the purpose of this, a move greater than 1% in either direction), showed the same result: positive coefficient, no substantive finding, and a near zero R square.

Take a look at the chart below, which only includes years when the first day moved up or down at least 1%.

It’s the same deal. Basically no predictive value.


Photo: Chart: Eric Platt/Business Insider, Data: Bloomberg

If you’re a believer in the January effect, you might as well shirk this and continue a long strategy this month. But otherwise, the data doesn’t lie. Take today’s surge with what little grain of salt you’d like.

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