January Ineffect

Story notes:

• January's rough start has many investors invoking the old saying, "So goes January, goes the year.
• Statistically, this belief isn't supported. History shows negative starts can be followed by positive years and vice versa.
• Market volatility is normal, no matter when it happens, and doesn't mean a prolonged downturn is at hand.

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January has commenced with gray weather, record snows, fierce storms, already broken New Year's resolutions (stupid leftover pumpkin pie), and the usual post-holiday gloom—not to mention a continuance of December's volatility. Most major market indexes are negative so far this year, leading many investors to invoke the old saw "so goes January, goes the year." Already, we're seeing stories highlighting the long and widely held belief that a rough start to January portends trouble ahead.

The Stress Is Just Beginning
By Tomoeh Murakami Tse, Washington Post

This article states, "If the first three trading days of the year are any indication, 2008 is bound to test the nerves of even the most poised investors." Fair enough—volatility always "tests nerves." Except the first three trading days are never an indication of what's ahead. Not ever. Three days of any month, no matter the calendrical significance, tell you nothing. Investors wouldn't make a stock forecast based on the Ides of March—there's nothing about any one day or group of days' returns that tells you anything about what to expect looking forward.

Statistically, this is easy to disprove by checking historical data to see what happened each January and the annual results. Throughout history, negative starts to January have been followed by all sorts of combinations of positive and negative returns. Positive start, negative January, positive year. Negative start, positive January, negative year. On and on. Looking at the six worst first 10 days for the S&P 500, you see US stocks ended positively four of those times—one year up a big 42%! Another up 26%! What does that tell you? Nothing—beyond stocks are positive more than negative. And the third best start ever ended the year down 15%. Not so great.

Fundamentally, this makes even less sense. What do a few days in January tell us about investor demand for securities? Markets don't obey a calendar. There's nothing magical about January's start suggesting markets must suddenly begin "behaving" themselves. Markets are volatile. They can be volatile in January, July, on Tuesday, the day after the Fourth of July—pretty much any time. Markets don't have neat steps-and-stairs increases, and if they did, you wouldn't be happy with the return you got. If you want that kind of steady appreciation, you're going to have to be satisfied with what you can get by buying US Treasuries and holding them to maturity (i.e., not much).

We call the market "The Great Humiliator" (TGH for short) around here for a reason. Its sole purpose is to humiliate as many people as it can for as long as it can for as much money as it can. Scaring investors out of superior long-term returns with a bumpy start to the year is one way the market robs otherwise rational people of their senses.

We remain confident the world is altogether too dour. Don't let TGH humiliate you out of the market with a bumpy start to the year—that's just what that filthy trickster wants.