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The Groundhog saw his shadow! Does this mean six more chilling weeks for stocks? Does the AFC winning the Super Bowl spell trouble for the markets? Is the “January barometer’” still in full effect; how January goes, so does the market?
The answer to all these questions is no. We always stick to the fundamentals to determine how we invest. Yet, there is a book called The Stock Market Almanac that tracks all of the above theories and more! Similar to The Farmers Almanac, it attempts to look at the past, and use it as a basis for what will happen in the future.
The Super bowl indicator has been correct 33 out of 41 times, as measured by the Dow Jones Industrial Average. This is a success rate of over 80%. However, since a particular football league winning a Super Bowl and the US Stock market have no real correlation, this is just a coincidence. Therefore there is no reason to expect it will work as a predictor of future bull or bear markets.
The January barometer is the hypothesis that stock market performance in January predicts its performance for the rest of the year. So if the stock market rises in January, it is likely to continue to rise by the end of the year. The January barometer was first mentioned by Yale Hirsch in the Stock Market Almanac 1972.
Historically, if the S&P 500 goes up in January, the trend will follow for the rest of the year. Conversely if the S&P falls in January, then it will fall for the rest of the year. From 1950 till 1984 both positive and negative predictions had a certainty of about 70% and 90% respectively with 75% in total. After 1985 however, the negative predictive power had been reduced to 50%, or in other words, no predictive power at all.
In 2014, we got off to a negative start, yet the market for the year was higher. Let’s hope that happens again this year.
THE WEEK IN REVIEW
Markets were driven lower in another volatile week of trading, ending the first month of 2015 in the red. For the week, the S&P 500 lost 2.77%, the Dow fell 2.87%, and the Nasdaq dropped 2.58%.1
One of the major contributors to the week’s losses was an unexpected miss in fourth quarter economic growth. The first estimate of Gross Domestic Product (GDP) showed that the economy grew an underwhelming 2.6% in the last three months of 2014. This is a significant drop from the 5.0% growth the economy saw in the third quarter and below economists’ expectations of 2.8%-3.0% growth. However, consumer spending was higher than expected, showing that Americans are still buying. Also, keep in mind that this is just the first estimate of GDP growth.2 A lot of economic data has yet to be analyzed, and we can hope for upward revisions in the months to come.
Earnings season marches onward and the news is mixed. While the reports we’ve seen from 228 S&P 500 companies show that earnings are up 5.5% over the same period in 2013, revenues are up just 1.7%.3 Overall, U.S. companies appear to be struggling with three factors:
Falling oil prices, which are seriously affecting energy companies and interrelated businesses.
The strength of the U.S. dollar, which is hitting companies that depend on foreign demand hard. A strong dollar makes it more expensive to buy U.S. products.
Weak global economic growth. This factor is also pressing down forward guidance from companies, many of which are expecting a tough business environment in 2015.4
Even if overall earnings numbers may not look inspiring, there are a lot of individual success stories in each sector. Though volatility is stressful, it can provide opportunities for investors who can be flexible. Part of what we do for our clients is look for those opportunities for growth in every market environment.
Oil prices continued to slide though some analysts believe we may be approaching an oil price floor. One industry insider believes that oil prices could double by the end of 2015 as oil companies respond to the supply glut by slowing down production.5
Looking forward, the week ahead is filled with more economic reports, including the January Employment Situation Report, which will hopefully show continual improvement in the labor market. Markets are likely to remain volatile in the days and weeks ahead, but we can hope that positive data might encourage investors to “buy the dip.”
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