The Standard & Poor's 500-stock index's 8.6% decline in January 2009 marks the second consecutive year in which the S&P 500 declined during the opening month of the year. Since 1929, there have been five other times that the "500" tripped up in two successive Januaries (1956-57, 1973-74, 1977-18, 1981-82 and 2002-03). In the remaining 11 months of the second year of these "double-dips," the S&P 500 gained an average 3.0% and rose three of five times. But don't get your hopes up too quickly. Twice the market fell in January three years in a row (1939-41 and 1968-70).
Why should we care if the S&P 500 rises or falls in January? Because of an old Wall Street adage, first observed by The Stock Trader's Almanac, that states: "As goes January, so goes the year." A positive performance by the equity markets in January has typically led to a gain for the full year, while a negative performance in the first month usually signald a decline for the entire year. Since 1945, whenever the S&P 500 advanced in January, the market continued to rise during the remaining 11 months of the year 85% of the time, posting an average price advance of 11.6% — substantially more than the 8.2% return recorded by the S&P 500's 12-month price appreciation for the past 64 years. Whenever the market declined during the opening month of the year, the S&P 500 fell an average 2.2% for the remaining 11 months. Its frequency of success, however, was no better than a coin toss at 48%. But it certainly worked last year. The S&P 500 fell 6.1% in January 2008, and posted an additional 34.5% decline through the end of the year.
I believe the January Barometer offers correlation with causation for behavioral reasons. I think investors are a lot like dieters; they look to January as a new beginning. With cash on the sidelines, combined with the desire to take advantage of the more favorable tax treatment offered by long-term capital gains, investors are likely to reinvest these assets in opportunities that are perceived to reap rewards over the coming 12 months. This logic has stood the test of time. Be reminded, however, that past performance is no guarantee of future results.
As I wrote in my soon-to-be-published book The Seven Rules of Wall Street: Crash-Tested Investment Strategies That Beat the Market, which leverages time-tested rules of thumb, or old sayings, to create market-beating portfolios, investors could have reaped even greater rewards by taking a cue from the three S&P 500 sectors or 10 S&P 500 subindustries that posted the strongest results during January. Since 1990, the three best performing sectors in January posted a compound annual growth rate of 7.5% in the following 12 months (February through January), vs. 5.0% for the S&P 500, and beat the market in nearly three of every four years.
The subindustry-level results were even more encouraging. Since 1970, the 10 S&P 500 subindustries with the best January performances went on to post a 12-month compound annual growth rate of 14.3% vs. 6.0% for the S&P 500 (excluding dividends).
What's more, this January Barometer Portfolio of subindustries beat the market 72% of the time. Of course, there's no guarantee that what worked in the past will work again in the future.
Last year's two January Barometer Portfolios posted mixed results. While the S&P 500 declined 38.7% from Jan. 31, 2008 through Jan. 29, 2009 (excluding dividends), the three-sector portfolio slumped 51.1%, as investors believed early in 2008 that Financials would experience a turnaround in the coming 12 months. They aren't so optimistic this time around. The best 10 subindustries, however, posted a decline of 32.5%, which was not as bad as the overall market's decline.
Through Jan. 29, the three best performing S&P 500 sectors were Health Care, Information Technology, and Utilities, while the 10 best performing S&P 500 sub-industries were Coal & Consumable Fuels, Computer & Electronics Retail, Computer Storage & Peripherals, Education Services, Electronic Components, Fertilizers & Agricultural Chemicals, Health Care Distributors, IT Consulting & Other Services, Oil & Gas Refining & Marketing, and Wireless Telecom Services.
So there you have it. A negative performance for the S&P 500 in January may indicate another challenging year ahead. For specific S&P 500 sectors and subindustries, however, January also shows that there is still the potential for outperformance.
Industry Momentum List Update
Here is this week's list of the subindustries in the S&P 1500 with Relative Strength Rankings of "5" (price changes in the past 12 months that were in the top 10% of the S&P 1500), along with an index component with the highest S&P STARS (tie goes to the issue with the largest market value).
Subindustry Company Ticker S&P STARS Rank Price (1/29/09)
Biotechnology Genzyme GENZ 5 $68
Brewers Molson Coors TAP 4 $42
Distillers & Vintners Constellation Brands STZ 4 $14
Education Services Apollo Group APOL 4 $84
Environmental & Facilities Services Waste Management WMI 4 32
Health Care Services Express Scripts ESRX 5 $54
Household Products Procter & Gamble PG 5 $56
HyperMarkets & Super Centers Wal-Mart Stores WMT 5 $48
Integrated Oil & Gas Exxon Mobil XOM 5 $79
Multi Utilities Sempra Energy SRE 5 $43
Packaged Foods & Meats Kraft Foods KFT 5 $29
Pharmaceuticals Abbott Laboratories ABT 5 $53
Restaurants McDonald's MCD 5 $59
Water Utilities Aqua America WTR 3 $20
Source: Standard & Poor's Equity Research
Stovall, the chief investment strategist for Standard & Poor's Equity Research Services, is the author of the forthcoming book The Seven Rules of Wall Street: Crash-Tested Investment Strategies That Beat the Market.
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