The Stock Trader’s Almanac looked back to 1950. When the first five trading days were positive, the US market finished the year up 82% of the time, with an average gain of 13.6%.
This year the S&P 500 is up for the first five trading days of the year. Pile in?
The close cousin of this rule is “as goes January, so goes the year”. Since 1970, if January was positive, so was the rest of the year 94% of the time. This January it was positive.
With January 2023 being a bit of a barn-stormer, does this mean we should now be 100% invested for 2023, and just go on holiday and ignore the market action?
I have been writing about, and sidestepping, bubbles and crashes since the 1980s, starting with the 1987 Crash. That experience, a vast amount of our research, and successfully handling client money throughout, means that I am in a decent position to judge stock market folklore or just plain BS. I am not perfect, but I have a decent foundation on which I can lean.
“As January goes…” is not BS, and it is a bit more than folklore, as it is well-evidenced.
Yet every January has a different context, and only the simple-minded would ignore that. The context is never simple to pin down, because the stock market, and the factors which influence it, are many and variable, sometimes complex, and others just plain unknowable.
So, let’s consider what we do know, and what we must not ignore.
If you rely solely on these January rules for your guide to 2023, you are ignoring an awful lot of other historical precedents which scream “take care!”.
If you rely on these rules now you are ignoring the fact (yes, 100% fact) that when the globally dominant US stock market is at the prevailing valuation extremes, you should expect falls in excess of 50%, which will occur over a number of years.
You are also ignoring the Superbubble analysis, when a valuation bubble is combined with an investment mania.
You are ignoring The Japan Problem.
You are ignoring The Four Wobbly Pillars.
You ignore the fact that some retail investors, at certain life stages, simply cannot afford to take a hit on their capital values, particularly when they are already drawing down on that capital. There will be a blog setting out this risk more precisely in coming weeks.
What we know is that there is simply too much risk right now to be gung-ho based on a single indicator – it appeals to our lazy nature, but the price could be very high.
Have A Plan
Most investors spend far too much time dealing with today’s noise, and too much time listening to pundits, masquerading as experts, who have little or no experience of managing investments or giving advice, are not and never have been authorised to do so, have no relevant professional qualifications, and have no track record of doing their own in-depth research. In fact, they have no track record – full stop.
One individual recently said that the January rule would provide “reassurance” to those who were anxious about 2023. I find that kind of punditry very scary, and worry for those who listen uncritically.
Rather than obsessing over these rules, spend more time figuring out how to make vastly better investment decisions. Take a good hard look at your investing plan.
Does it have an attack and a defence?
Your attack will identify where there is momentum and what is cheap, and, in turn, which funds to buy to exploit these factors.
Your defence will mean having a Stop-Loss. This means you will literally stop a loss getting bigger by selling your fund at a certain point e.g. when the fund falls by 10%.
Having sorted this out, your investing, this year and beyond, should then be considerably more straightforward and your time better spent.
And you never know… you might even make more money!
ACTION FOR INVESTORS
- Don’t obsess over single historical patterns, however compelling…
- …but do a little bit of more serious work on your plan.
- When markets fall, and investors are running for the hills, there are buying opportunities to be had…
- …if you have a plan in place, and the discipline to follow it, there will be a great opportunity to pick up bargains.
- Just be patient while events unfold.
FURTHER READING