Thursday, February 4, 2016



Very weak January's have had a tendency to lead to weak long-term returns in the stock market.

Investors must be thinking, "thank God February is here." Well, before we put the brutal January to rest, we have one more depressing set of facts to digest. January 2016 saw historic weakness and volatility. Previous looks at intra-month variations on the "January Barometer" have pointed to weak returns going forward for stocks. This note will put a bow on things as we look at the dismal month-end tally and whether it suggests weakness going forward as well.

As of last Monday, the stock market was down -8.84%, judging by the Dow Jones Industrial Average. At that point, it would have marked the worst opening month in 116 years. As it happens, the DJIA rallied furiously over the last 2 days of the month. Even with that rally, though, the DJIA still closed the month down -5.6%, the worst since 2009, and 1990 before that.

Can anything be gleaned by looking at other weak January's, historically? Well, with the usual disclaimers that these seasonal patterns are merely averages and past results do not guarantee anything about future returns, etc…,we took a look at the historical stats. Using the DJIA since 1900, there have been 18 other years in which the DJIA lost at least 4%. Since we are trying to find reasonable comparisons to our present case, we thought to weed out years in which the DJIA had already suffered considerable weakness. Somewhat arbitrarily, we eliminated 4 years that saw the index already down over 20% from its 52-week high coming into the year (1941, 1970, 1978 and 2009).

We were then left with 14 years that began with the DJIA within 20% of its 52-week high and experienced January losses in excess of 4%.

1901 (-6.2%)
1910 (-6.5%)
1913 (-5.4%)
1916 (-8.7%)
1939 (-6.9%)
1957 (-4.1%)
1960 (-8.4%)
1962 (-4.3%)
1968 (-5.5%)
1977 (-5.0%)
1990 (-5.9%)
2000 (-4.8%)
2008 (-4.6%)
2014 (-5.3%)

Returns following all of of these January's was weak, as the median returns indicate here. This is especially the case over the longer-term, i.e., up to 3 years later.

The tendency for weakness following these dismal January's is especially evident when contrasted with the median performance following all January's, all "up" January's – and even versus all "down" January's.

If you believe in these historical, seasonal patterns, there would appear to be something noteworthy about these especially bad January's. Incidentally, we would rank seasonal factors toward the bottom of our list of investment inputs. The compilation of evidence looking at January weakness makes for a compelling bearish argument – especially over the longer-term, e.g., years.

In other words, if there is validity to the January Barometer, it may more appropriate to call it the January "Bear-ometer" in 2016.

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