As this edition of Running Money® is being written, the US stock market is experiencing what I believe to be a periodic pullback, something we call a potential “buying opportunity”. These opportunities are often created by irrational or emotion-driven investors (or advisors) that decide the “market is too high” or worse yet, the year ahead is doomed because of some mysterious legend like “the January Barometer”, the “Super Bowl Indicator” or even the “Year Two Curse”.
All three of these superstitions have some element of truth:
- The January Barometer claims in part that “as goes January, so goes the whole year”; if January is negative, the year will be negative.
- CONNECTION: Analysing data of the S&P 500 Index provided by Yahoo!finance, beginning in 1950, there are 24 Januaries (prior to this year) whenindex return was negative.The average return for those full years has also been negative, averaging -4.0%.
- o TRUTH: In eleven of those years, the index ended theyear in positive territory. That’s just about as close to a coin toss as is possible with such a small group. So just because January was negative doesn’t mean the year will also be down.
- The Super Bowl Indicator claims that when a former AFL team wins, the year will be negative.
- CONNECTION: Following the first seventeen Super Bowls, there was a mysteriously high correlation, as several of the AFL’s wins corresponded to recessions.
- TRUTH: Since then, the trend not only breaks down, but when the Steelers or Colts (and if it ever happens, the Browns) make it to the championship BOTH teams are former NFL teams!
- The Year Two Curse talks about the second year of a US Presidential four year term. According to the curse the markets struggle in the second year of each four years, which would be this year for this term of the Obama administration.
- CONNECTION: According to my calculations, using the same data from above, the average return during the second calendar year of each four year Presidential cycle is indeed the lowest of the four years.
- TRUTH: At 5.4% it’s just a smidge below the first year (6.0%) and fourth year (6.6%) averages. Only the 3rd year is statistically different, with an average return over 17%.
Please don’t be misled by these myths. In the long run, stocks can provide excellent potential return opportunities, but they come with risks associated with economic, business, political and managerial decisions. In the short run, prices can be very volatile, as consumer sentiment, rumors, media saturation, and just plain stupidity can influence investor decisions.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
i For purposes of defining the “market” or “stock market”, I’m using the S&P 500 index, an unmanaged index which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results. The data is sourced from Yahoo!Finance.
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