The positive reading for the S&P 500 at the end of January may be a bullish signal for the year, according to the market history books. The so-called January Barometer follows the simple guideline that "as the S&P 500 goes in January, so goes the year." Devised in 1972 by Yale Hirsch, then editor of the Stock Trader's Almanac, the January Barometer has since had an impressive accuracy rate.
Skeptical? Take a Look at the Numbers
"When January is up, the year is up 80% of the time, with an average gain of 13.0% and February-December is up 78% of the time with an average rise of 8.6%," according to a BofA Merrill Lynch Global Research report.
Throwing a bit more bullishness into the seasonal brew, 2017 stands as the first year of the Presidential cycle. That generally has sub-par annual and February-December returns of 5.1% and 4.2%, respectively, according to BofA Merrill Lynch Global Research. But, "When January is up in Year 1, the year is up 77% of the time with an average gain of 13.5% and February-December is up 77% of the time with an average return of 9.3%," the report said. Here's the scorecard for January.
Sector Scorecard for January
|S&P 500 +1.8%|
|Information Technology +4.3%|
|Consumer Discretionary +4.2%|
Year-to-date data through Jan. 31, 2017 source: S&P 500 GICS Sector Scorecard
Looking at recent market action, JJ Kinahan, chief market strategist at TD Ameritrade notes that "January certainly is a measure of how people are looking at the market. The return to stocks at the beginning of the year is a positive start to the year. We will have to see if the excitement can continue throughout the year."
Spotlight on Tax Policy
Looking ahead, Kinahan points to the administration's proposal regarding tax policies as both a potential positive factor and potential risk for the stock market in 2017. A tax reform package has been proposed, which includes tax breaks for individuals as well as for companies holding funds overseas. One proposal includes an offer to U.S. companies to bring money back to U.S. shores with a one-time tax rate of 10%, versus the current tax rate of 35%.
Some of the recent rally in U.S. stocks has been fueled by expectations of tax policy changes, which could leave the market vulnerable to a setback if the proposals don't emerge as expected.
Tech Sector Impact?
Drilling down into sectors, Kinahan notes that the technology sector may benefit, if a policy were enacted that grants a tax break on repatriated funds. A 2015 study by the U. S. Office of Management and Budget estimated that companies are holding about $2.1 trillion in cash overseas, with much of it held by big tech companies. Other studies have put the figure as high as $2.5 trillion. Microsoft reportedly holds more than $100 billion abroad, while Apple holds near $91.5 billion.
For investors interested in exploring the opportunities that could lie ahead for some of these technology companies, the Company Profile tool in the thinkorswim® platform from TD Ameritrade can offer insight on international sales and more. An example of the tool is shown in figure 1 below.
Not to rain on the bullish parade, but there there is another seasonal prognosticator—some would say superstition—having to do with the results of a certain football game played last weekend, that suggests a down year in the stock market.
As far as indicators go, some might be more relevant than others, but everyone is free to choose their own.
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