As goes January, so goes the year.
That is the premise of the January barometer, which suggests that stock returns in January set the pace for the rest of the year.
The S&P 500 (.SPX) is hanging on to a 1.4% gain for the month, a bullish signal for the rest of 2020, with three trading sessions to go.
Stocks have been under pressure in recent days on concerns about a viral outbreak in China and its possible effect on the global economy. The Dow Jones Industrial Average (.DJI) briefly gave up its gains for the year on Monday, before a global market rebound helped stem the declines.
The selloff has coincided with a resurgence of volatility. The Cboe Volatility Index, which measures expected moves in the S&P 500 index, climbed earlier in the week to its highest level since October. That suggests more big swings might be ahead.
If the index can eke out a gain for January, history indicates bigger gains might be in store for 2020.
When the S&P 500 rises in January, the average return for the rest of the year is 9.12%, and the remainder of the year is positive 78% of the time, according to Dow Jones Market Data. However, when the index drops in January, the average return for the rest of the year drops to 1.39%, and the remaining months are positive 58% of the time.
Since its inception in 1928, the average return for the S&P 500 for January is 1.24%. The average return for the rest of the year is 6.34%.
Recent history shows the barometer is a trend, not a scientific certainty. It held true in 2019 and 2017 when the S&P 500 rose in January and climbed for the full year. But it didn’t apply in 2018 when the index rose in January but fell for the year, or in 2015 and 2016 when it fell in January but rose for the year.
The S&P 500 has broken a number of notable streaks in recent days.
Monday’s 1.6% loss was the index’s first move—higher or lower—of more than 1% since October. Its 70-session streak of muted swings was the longest since the 74 trading days ending October 9, 2018, according to research from DJMD, and it ranks as the fifth-longest stretch since 1969.
The index also posted back-to-back declines for the first time since Dec. 10. The 29-trading-day streak without consecutive declines through Thursday was the longest such stretch since mid-November, according to DJMD.
The selloff itself was likely to spark a snapback rally, said Instinet executive director Frank Cappelleri, and in early trading on Tuesday it appeared to be doing just that. However, one day’s rebound won’t be enough to determine that the selloff was an aberration.
“That won’t guarantee the pullback is over,” he said.
Whatever the new trend is, it will have plenty of fuel to build on. The next two weeks are heavy with data—a flurry of earnings reports both weeks, the fourth-quarter GDP report this week, and the monthly jobs report next week. On top of that and the unfolding coronavirus is the impeachment trial under way in Washington.
The only way to know for sure whether any or all of that news will matter, Mr. Cappelleri said, “is when the market reaction tells you it should.”
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