NEW YORK – If you’re an investor who has faith in the old stock market maxim “as January goes, so goes the year,” you’re probably feeling pretty good about 2018 based on what you saw last month. Trouble is, January’s record as a predictor for the rest of the year has been spotty recently.
Historically speaking, it’s true that if stocks rise in January, they usually finish the year higher as well. And according to LPL Financial, the connection is especially strong if the January gains are big: since 1950, when the Standard & Poor’s 500 index has risen at least 5 percent in January, it’s risen about 16 percent over the last 11 months of the year on average.
The S&P 500 climbed 5.6 percent last month, so if the historic average holds, it would finish the year with a gain of around 20 percent. That’s much better than most market-watchers had hoped for at the start of the year.
But recently, January hasn’t been a very good predictor of what the market will do. The January indicator has been “wrong” eight times since 2001: either the market has finished the year higher after a poor start, or it’s ended lower after making gains in the first month. Between 1950 and 2000, January was only “incorrect” seven times.
Last year the S&P 500 gained 1.8 percent in January — not bad, but nothing special — only to rally as investors saw evidence the global economy was getting stronger. The index, which is favored by financial professionals, rose about 19 percent in 2017.
The year before, the S&P had one of its worst starts ever and dropped 5.1 percent in January 2016. But thanks to some gradual gains and a surprise rally after the presidential election, it rose 9.5 percent for the year.
Some experts are forecasting bigger gains for the market in 2018 after its strong start, but even when January is “correct” about predicting the direction of the market, the ride isn’t necessarily smooth. With stocks in an unusually calm stretch and some experts saying they are due for a downturn, that might hold true this year as well.