Market Is Following A Classic January Playbook So Far

So far this year, the stock market is doing exactly what market lore says it should. According to tradition, four things are true about January:

· The market is likely to rise.

· Small stocks will excel.

· Last year’s losers will rebound.

· As January goes, so will go the year.

This year through January 20, the Standard & Poor’s 500 Total Return Index is up 3.55%. If it continued compounding at that rate, it would be up 83.3% for the year. That, of course, is too much to hope for—but so far so good.

Small stocks, true to what conventional wisdom predicts, are excelling. The Russell 2000 Index of small stocks is up 6.06% through January 20 (including dividends). As a partisan of small stocks, I’m delighted.

What about last year’s losers? As a test case, I looked at five big losers that I wrote about in mid-December: Coinbase GlobalCOIN
, SnapSNAP
, TwilioTWLO
, Lucid Group (LCID) and Roku (ROKU).

These dogs of 2022 are looking like racehorses in 2023, with an average gain of 24.3% in just three weeks.

Rarely have I seen the conventional wisdom about January come through so strongly.

Infamous Barometer

Now, will the fourth tenet also hold true? The theory that January predicts the full year is called the January Barometer. The theory has been around for many years, but its predictive record is spotty.

I have studied the performance of the January Barometer over 73 years, from 1950 through 2022. In the simplest sense, it has been right 72.6% of the time. That is, the full year has gone in the same direction as January in 53 cases out of 73.

But wait a moment: January is a part of the year it is supposedly predicting. So many people ask, how does January do in predicting the next 11 months? On that basis, the barometer has been right 67.1% of the time.

Well, that’s better than chance. But I believe a predictive system should be compared against a naïve forecasting model. The accuracy of weather forecasts, for example, can be gauged against a naïve model that predicts every day will resemble the day before.

What naïve model should we use here? How about one that predicts every year will be an up year? That naïve model is right 76.7% of the time.

Thus, the January Barometer is less accurate than a rose-colored-glasses system that thinks every year will give investors positive returns.

When January is down, the Barometer is especially wobbly. It is wrong 56.7% of the time.

When the Barometer is up, it is right 93.0% of the time. That’s good news, but as I write this, January still has seven trading days remaining. So I won’t break out the bubbly yet.

My best guess for the market this year is that it will be an up year, but marked by at least one downturn of 15% or so, as the U.S. undergoes a mild recession.

Barometer’s Defense

Laurent Condon, who has won several investment contests I run in this column, thinks I’m too harsh on the January Barometer.

By his reckoning, the average stock-market return for February through December is 10.68% in years when January is up. It is only 1.28% in year when January is down.

Ned Davis Research, using reasoning similar to Condon’s, also believes that the January Barometer is worth paying attention to.

Fast Starters

Some stocks that have sprinted out of the gate particularly fast this year are Continental Resources (CLR), up 68%; Coinbase Global, up 56%, National InstrumentsNATI
, up 47% and WayfairW
, up 42%.

Continental was founded by Harold Hamm, one of the most successful wildcatters in history. Hamm wants to take it private, and has offered $74.28 per share. As of January 20, the price was only a penny below that price. I like the stock, but if Hamm succeeds, there’s not much juice left in it.

I don’t like Coinbase. Its earnings history is spotty and thefts of cryptocurrency are too common.

National Instruments have been consistently profitable, but its stock looks expensive to me at 4.4 times revenue and more than six times book value (corporate net worth per share).

I’d stay away from Wayfair, which is a major online seller of furniture and home goods. It has posted losses in nine of the past ten years, and its long-term debt has risen rapidly of late.

Disclosure: I have no positions, long or short, in the stocks discussed in today’s column, personally or for clients.