BUNK 24
SO GOES JANUARY
So goes January” is as old as the hills! This popular myth says if the first few days of January are down, the month will be too, and so will the year. There are minor variations of this myth—some claim it’s the first day alone that’s predictive. Most scoff at that, thinking it’s the first 3, 5, 10, 17, or some other random and arbitrary number (unable to see why if one day isn’t predictive, then 3, 5, 10, 17, or any other random number won’t be either). Some say it’s the first week, but then where does the holiday fall into that? And do four days make a week? All of this is nonsense.

Cognitive Errors Galore

There’s a whole mess of cognitive errors that happen with this and any other day-, month-, or season-related myth (like “Sell in May,” coming up in Bunk 25, or the supposed “Santa Claus” or “summer” rallies). First, almost never do you hear “so goes!” if January starts strong. Folks don’t say, “Phew! January was positive. No need to worry about the rest of the year!” No—folks who like this bunk usually use it to prop up bearish biases.
Second, this myth causes folks to reframe. If January is down and the year too, the “so goes” crowd claims victory (usually loudly). But if January is down and the year finishes up, the “so goes” crowd never issues a mea culpa.
Instead, they’ll claim, “Of course it doesn’t work every year. You must look at the long-term average.” They change the observation period for occurrences that don’t fit their pre-set notions. Years that work the way they think they should are, to them, hard evidence this works. Years that don’t aren’t, to them, evidence it’s hooey. This is a perfect example of the human behavioral quality of confirmation bias: Seeing what you believe and not seeing what you disbelieve—a trait behavioralists have proven in recent decades.
Third, it’s a silly human quirk to assign meaning to random groups of 30 or 31 days. There’s nothing inherently more or less predictive about January, but because of what behavioralists call “mental accounting,” we assign great import to the start of each year. But capital markets care nothing about mental accounting.
It’s actually, to me, beyond amazing this bunk endures. Even anecdotally, this one starts falling apart fast. Just think about recent history. The S&P 500 fell 8 percent and world stocks fell 9 percent in January 2009.1 But the year ended up 26.5 percent and 30.0 percent, respectively.2 If you followed this bunk, you missed that. There are plenty of years January is up, down, or sideways, and the year does something entirely different.

Check the Box

We can use the four-box methodology to debunk this—a good debunkery trick you can use often (and we’ll use again for fears of a too-weak/too-strong dollar in Bunk 27). Table 24.1 shows the number of years since 1926 that stocks were up in January and up for the year, as well as down in January and for the year—the way many believe the stock market works. But it also shows when January is up and the year down, and the reverse.
Since 1926, we’ve had a positive January and then a positive year 45 times—nearly 54 percent of the time. That shouldn’t surprise, since in an overall positive year, more months should be up than down. Plus stocks are up more than down over history—roughly two-thirds of the time. Since 1926, January has been up 63.1 percent of the time, and 71.4 percent of the years have been up. (Tell that 71 percent number to folks who mope about secular bear markets and other such silliness.) With no guarantee about the future, historically, stocks have really “wanted” to be up more than down. With so many positives relative to negatives—about two to one—you get more up years than down years and more up Januarys than down ones.
Table 24.1 So Goes January? (S&P 500)
Source: Global Financial Data, Inc., S&P 500 total return from 12/31/1925 to 12/31/2009.
025
Just 8 times—9.5 percent—January was up and then the year was down. Rare! So if up-up years happen most, and an up January rarely leads to a down year, does that mean January is predictive? Nope. A down January is basically a coin flip—historically you get about the same number of up and down years following a down January—17.9 percent to 19.0 percent—the difference of one occurrence. Seen another way, a flip-flop year—January up in a down year and down in an up year—has happened more often (27.4 percent) than a down January and down year (19.0 percent).
I’ll say repeatedly in these pages: One easy way to do debunkery is ignoring any rule that says, “When this happens, that’s automatically bad (or good).” No one thing is ever a definitive sign to either bail on stocks or be bullish. If it were that easy, someone, somewhere, would have discovered the trick and be the richest guy in the world. And because it is so easy to do now, we’d all be doing it. Baloney and bunkonometry! Plus, global capital markets are far too complex for one indicator to be so powerful. So ignore January. So goes January is how January goes, and then it’s gone—and nothing more.
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