Business

January's over. What's next for stocks? Probably more volatility

Posted February 3, 2020 2:25 p.m. EST

— Will stocks go up this year? It all depends on which market indicator you choose to follow.

January was a choppy month on Wall Street. Stocks did well the first few days of this year and the S&P 500 went on to hit a new all-time high on January 22. But concerns about the Wuhan coronavirus have hit stocks hard since then.

And for what it's worth, the market is off to a promising start on the first trading day of February. But January's volatility poses a problem for investors trying to read the tea leaves.

Wall Street traders often talk about how if the market goes up in the first trading days, that bodes well for stocks for the rest of the year.

"When the first five trading days of the year are positive, as they were again, the stock market finished the year in positive territory 82% of the time," said Federated Hermes Chief Equity Market Strategist Philip Orlando in a report Monday, citing data from the Stock Trader's Almanac that stretches back to 1950.

"Investors make their annual retirement and college-savings contributions and their changes in asset allocation early in the New Year, reflecting their bullishness," Orlando said.

Then again, some investors might be following the "January Effect," which looks at the performance of the market for the whole month, "when stocks rise because of stock inflows due to tax selling in December and corporate bonuses paid in January," said Bruce Bittles, chief investment strategist with Baird, in a report.

"Stocks do not always rise in January, but they have risen 66% of the time since 1928," he added.

Presidential election year returns and the Super Bowl?

Two of the market's major indexes, the Dow and S&P 500, were in positive territory for last month until Friday's huge selloff wiped out January gains. But the tech-heavy Nasdaq closed out the month just over 2% higher.

A presidential election year also muddles the picture further. The S&P 500 has not dropped during an election year since 1940 when the current president is up for reelection, as President Trump is now.

"If an incumbent president was up for reelection, stocks tended to do extremely well," said LPL Financial Senior Market Strategist Ryan Detrick in a report.

The S&P 500 soared 11.7% on average in years when the president runs for reelection, compared to an average gain of only 2.4% if the president is a lame duck.

And then there's the Super Bowl indicator.

Detrick noted that stocks have often gone up sharply for the full year when the Super Bowl winner was from the original National Football League, which is usually the NFC team. But when the Super Bowl winner is an original member of the NFL rival American Football League, now the AFC, stocks have had smaller increases.

The AFC champion Kansas City Chiefs defeated the NFC's San Francisco 49ers in the Super Bowl.

The S&P 500 finished the year flat the only other time the Chiefs won the Super Bowl ... in 1970. Meanwhile, the market typically enjoyed an average gain of nearly 20% in the five years when the Niners won the Super Bowl.

Of course, the outcome of the NFL's big game is not a serious reason to buy or sell stocks. After all, the market has gone up when the AFC's New England Patriots and Denver Broncos won championships.

At the end of the day -- or rather, the year -- smart long-term investors know that the market's direction is dictated more by earnings, economic growth and interest rates -- not how stocks did in January or who won the White House and Super Bowl.

The only thing that seems certain is that market volatility is back with a vengeance.

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