I’ve been reading a lot about the so-called correlation between returns in this first month of trading and the rest of the year. I’m sure you have, too — if not, check out a very good roundup of January lore by J.C. Parets of All Star Charts.
But frankly, in my admittedly short investing life, I have never really noticed a trend. So I decided to check things out for myself.
The bottom line to me is that while longer-term trends might hold water, purported correlation between January returns and the full-year returns for the broader market is tenuous at best in this new market.
After all, isn’t it natural that the tried-and-true “rules” of the market fall away in this new world of high-frequency trading, leveraged ETFs and petrified retail investors? Should we really place equal weight on how the Dow Jones performed in 1951 and how the market behaved in 2011?
Sure, some folks like to geek out on 100 years of data in an Excel spreadsheet. But since the dot-com era, the rules are different — and the data should be looked at differently, too.
But that’s a big philosophical discussion for another time. Back to the January correlation talk; let’s look at the past 15 years of numbers.
Since 2001, there have been only five years during which January definitively represented the movement of the market for the rest of the year. That’s 5 out of 12 — less than half, less than inspiring.
And if you want to allow things like the 0.1% gain in 2011 to count as technically “predictive,” which I think is tenuous, the win rate of the past 12 years is 50-50.
If you want to make the statistics work in your favor, you can include both the run-up to the dot-com craze as well as the breakdown as well as the on-the-bubble years and you get to 10 out of the last 15 years with correlation. I guess 66% is persuasive, but hardly a lock.
All this is not to say that previous research and commentary about January’s importance is necessarily wrong. But I want to suggest the possibility that we could be witnessing the breakdown of this trend — and perhaps many others — based on more recent data.
Just because we have figures on stock performance back to a time of horse-drawn carriages doesn’t mean we should apply those numbers to our current Wall Street world. Call me young and foolish, with no sense of history. But I think past is precedent only for so long — and when the world changes, the rules and axioms we use need to change, too.
So stop placing so much importance on January returns. Lately, it hasn’t been a definitive or consistent indicator. And as an investor in this crazy new market, you need to place importance on the latest data above all else.
- The first day of trading in 2013 opens with a pop. (InvestorPlace.com)
- Once Again, J.C.’s great roundup of January lore. (All Star Charts)
- But what about the OTHER January rule: that stocks almost always go up to start the year? (The Daily Telegraph)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.