We’re now two weeks into January 2020, and it has been a great couple of weeks on Wall Street.
It has been so good, in fact, that the S&P 500 has hit a new all-time intraday high each of the past five trading days. This is fantastic news, but it may not be as fantastic as many in the financial media are making it out to be.
The January Barometer
This time of year, stock market prognosticators always start talking about the “January barometer,” which is the idea that “as January goes, so goes the rest of the year.” Yale Hirsch popularized the idea of the January barometer in 1972 when he first published The Stock Trader’s Almanac.
Let’s get this out of the way up front: we are somewhat skeptical of almanac investing.
Ostensibly, the January barometer looks at the entire month of January, but many analysts like to break things down even further by only looking at the first week of trading in January. For example, Barron’s published an article last week stating:
“History shows that the S&P 500 index has ended the full year in the same direction as it began it in 82% of presidential-election years since 1950, according to data compiled by Dow Jones Market Data. The S&P 500 rose 0.7% in the first five trading days of 2020, suggesting a higher finish to the year if the historical pattern holds true.”
Everything in those two sentences is technically correct. It even includes another favorite concept of almanac investing — the presidential cycle — that’ll be addressed in a later update.
However, the caveat “if the historical pattern holds true” is the most important part of that statement. That’s a pretty big “if.”
Correlation Is Not Causation
You can mine the performance data of the stock market — which by its nature is built to move higher over the long term — and find lots of these bullish patterns in the data. But correlation doesn’t equal causation. Just because this current bullish run is happening at the beginning of January doesn’t mean it is going to have a magical impact on where the stock market finishes 2020.
Now, don’t get us wrong. We believe in the power of trends in the stock market. We like that the strong bullish trend that started with a bullish breakout last October has continued into January. Just two weeks ago in our Weekly Update, we talked about the trend being your friend. If the trend has been incredibly bullish for the past decade, we shouldn’t expect it to be any different at the start of this new decade.
We just don’t think you can put too much stock in reading the tea leaves of the market action during the first week of January. It’s better to focus on the longer-term fundamentals.
The Bottom Line
The S&P 500 continues to reach new all-time highs, but we don’t need to know how the index is going to get by the end of 2020 to take advantage of the current bullish momentum.
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