Every year, Wall Street prophets polish their rose-tinted glasses by reviewing the “myths” that are supposed to guide the stock market into the new year. And every year, numerous studies show that most have little or no benefit.
January effect
This is a myth that promotes the idea that January is the best month to invest in stocks. This pitch is aimed at appealing to new investors who have just received their year-end bonus and are looking to dip their toe into the stock market.
Please stop.
It's true that from 1928 to 2000, the overall stock market rose nearly 2% per month. This is much higher than the average for other months of the year.
But that was then. Starting in 2000, the stock market actually recorded negative returns (-0.3% on average) until January 2023. In January 2024, the overall market was up just over 1%.
Investopedia's top contributor Preston Cherry called the January effect an “old story,” and Investopedia's research proves it.
Looking back at the SPDR S&P 500 ETF (SPY) (which tracks the S&P 500 or Standard & Poor's 500) since its inception in 1993, you may wonder how the term came to be used. Masu. In the 31 years since then, January has been a winning month 18 times (58%) and a losing month 13 times (42%), making the odds of a profit slightly higher than flipping a coin.
Furthermore, from the beginning of the market rally in 2009 until January 2024, January was positive and August was negative.
While the January effect remains an interesting historical phenomenon, its relevance in modern markets seems to be waning, and investors are advised to consider other factors when making investment and trading decisions. Masu.
Burton Malkiel, author of the classic financial book A Random Walk Down Wall Street (currently in its 13th edition), has a recurring joke: “The January effect is more likely to have happened last Thanksgiving.”
January barometer
This reflects the popular saying, “When January ends, another year moves forward.” Yale Hirsch, creator of the Annual Stock Trader's Almanac, first mentioned this anomaly in 1972. This anomaly was true from 1950 to 1984, and was true three out of four years. But since 1985, the January barometer has broken down and no longer provides any predictive value about the future of the market.
super bowl indicator
This is a unique but very accurate metric that depends on which team wins the Super Bowl. When an American Football Conference (AFC) team wins, the stock market tends to decline that year. Conversely, if a National Football Conference (NFC) team wins, the market tends to rise for the rest of the year.
As of January 2022, this prediction was correct in 41 out of 55 games, for a win rate of 75%. Since 1978, he has answered 29 out of 43 games correctly for a 67% win rate.
presidential election cycle theory
This theory posits that the stock market performs relatively poorly during the first two years of a presidential term, rebounds strongly in the third year, and continues to perform well in the fourth year.
This has been proven to be true. Charles Schwab researcher Lee Ball decided to do the research in 2016 and found that the third year of a presidential term consistently outperforms other years by a factor of two.
Now that the Biden administration has just ended, this theory has worked. The S&P 500 rose 26% in Biden's first year in office, but fell 18% in his second year. The third year (2023) showed an increase of 24%, and the year just ended showed an increase of more than 25%.
What are the best metrics?
Past performance is the best predictor of future performance. In other words, historically high prices will eventually fall to their long-term averages. Statisticians call this “regression to the mean.” To the average investor, it's known as “stocks can't grow to the sky.”
The difficult part is timing.
Since 1930, the stock market has grown an average of just under 7% every year, accounting for inflation. This means the stock has outperformed its average by almost four times over the past two years. Stock prices could take a serious hit in the first year of President Donald Trump's second term.
If you factor in presidential election cycle theory and strange Super Bowl metrics (current odds indicate the Kansas City Chiefs are likely to win whoever they play on Sunday, February 9th), investors will need to prepare for significant stock market fluctuations in 2025. .
