As Goes January, So Goes the Year?


By Sam Stovall Did 2005 start out on the right -- or wrong -- foot for equity investors? The market may be in for a down year after stumbling in the first month, according to the January Barometer. The Barometer, made famous by the Stock Trader's Almanac, states that the S&P 500 index's performance during the month of January is indicative of how it'll fare for the remainder of the year.

While some first impressions can be misleading, and while past performance is not a valid indicator of future results, we think this particular market predictor has some merit. Investors, like dieters, often look upon January as a new beginning, in our opinion, aiming to reposition their portfolios to take advantage of what they believe lies ahead.

S&P 500 Performance in Jan. 1970-'04

Freq. of Correct Forecast

Average 11-Month % Change

Up

86%

11.7%

Down

46%

-1.0%

Since 1970, whenever the S&P 500 advanced in January, the market posted a further increase in the remaining 11 months of the year 86% of the time, gaining an average of nearly 12%. Whenever the market fell in the first month of the year, the S&P 500 subsequently declined an average of 1% (although its frequency of correctly forecasting a down year was less than stellar, at only 46% accuracy). Notable exceptions to the forecasting acumen of a down January occurred during the turnaround years of 1982 and 2003, when the S&P 500 posted 11-month increases of 16.8% and 29.9%, respectively.

What about this year? During January, 2005, the S&P 500 declined 2.5%. We think that one reason for investor concern this year, despite the modest rally that marked the end of the month, is that following gains in 2003 and 2004, no one can say that 2005 is a turnaround year.

What's more, whenever the S&P 500 declined in January following two or more full-year increases in the broad benchmark, the S&P 500 was either flat or lower in the remaining 11 months of the year, posting an average decline of 6.6%. The January Barometer signaled an impending 11-month decline in 1973, 1977, 1981, and 2000. In 1990, a down January was followed by only a 0.3% gain for the S&P 500 during the remaining 11 months of the year. (Despite the historical odds favoring a flat to down year, S&P's Investment Policy Committee believes that, as a result of solid anticipated economic and earnings growth, the S&P 500 will regain its upward bias as the year progresses and will close 2005 at 1,300, for a near 7.5% year-over-year price advance.)

Since the January Barometer has been successful in predicting the direction of the overall market, can the same be said for selecting winning industries? Can the best-performing industries in January, as a group, be used to establish a "frozen" portfolio for the coming 12-month period? We found the historical answer to be a resounding yes. (We selected a 12-month holding period, rather than 11 months, so the portfolio was never in cash.)

From 1970-2005, frozen portfolios consisting of the 10 industries from the S&P 500 with the best performances during January went on to outperform the S&P 500 during the coming 12 months 74% of the time. These January Barometer Portfolios, or JBPs, posted a compound annual return of 16.9%, vs. 7.8% for the S&P 500 (dividends were not included).

From Jan. 30, 2004 through Jan. 31, 2005, while the S&P 500 gained 4.4%, the JBP gained 7.3% on an industry basis. Since no exchange-traded funds, or ETFs, emulate S&P subindustry indexes, we designated the company with the largest market value in each subindustry index as a proxy. The performance of the designated proxy outfits during the period suffered by comparison -- up only 0.3% -- due mainly to the 40% and 30% declines for Agilent Technologies (A

; S&P investment rank, 3 STARS, hold; recent price, $22) and Cisco Systems (CSCO

; 5 STARS, strong buy; $18.04), respectively.

Let's turn to this year's edition. The JBP for 2005-06 consists of the industries shown below. Companies with the highest market value serve as that industry's proxy, regardless of S&P STARS ranking.

2005-06 January Barometer Portfolio

S&P Industry Index

Co. w/Highest Mkt. Value

Ticker

S&P STARS Rank

Closing Price (1/31/05)

Agricultural Products

Archer-Daniels-Midland

ADM

3

$24.20

Drug Retail

Walgreens

WAG

5

$42.61

Health Care Facilities

HCA Inc.

HCA

3

$44.52

Home Entertainment Software

Electronic Arts

ERTS

4

$64.34

Multi-Utilities & Unregulated Power

Duke Energy

DUK

3

$26.79

Oil & Gas Drilling

Nabors Industries

NBR

5

$50.40

Oil & Gas E&P

Devon Energy

DVN

5

$40.67

Oil & Gas Refining, Mktg. & Trans.

Valero Energy

VLO

4

$52.00

Steel

Nucor

NUE

4

$56.16

Tobacco

Altria Group

MO

4

$63.83

As a reminder, when you contemplate this "portfolio" (and as you consider any investment, of course): Past performance is no guarantee of future results.

Industry Momentum List Update

For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), their proxies (the highest STARS-ranked companies in the sub-industry index -- tie goes to the largest market value) as of Jan. 28, 2005.

Industry

Company

Ticker

S&P STARS Rank

Recent Price

Agricultural Products

Archer-Daniels-Midland

ADM

3

$23

Commodity Chemicals

Lyondell Chemical

LYO

3

$28

Consumer Electronics

Harman International

HAR

3

$121

Fertilizers & Ag. Chem.

Scotts Co.

SMG

4

$68

Homebuilding

Standard Pacific

SPF

5

$65

Hotels, Resorts & Cruise Lines

Carnival

CCL

4

$57

Internet Software & Services

Yahoo!

YHOO

4

$35

Managed Health Care

PacifiCare

PHS

5

$60

Oil & Gas E&P

Devon Energy

DVN

5

$43

Oil & Gas Refining, Mktg. & Trans.

Valero Energy

VLO

4

$51

Steel

Nucor

NUE

3

$55

Trucking

CNF Inc.

CNF

4

$47

Required Disclosures

5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

As of December 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations and 12.2% with sell recommendations.

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.

Disclaimers

This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Stovall is chief investment strategist for Standard & Poor's


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