Notwithstanding the Dow’s nearly 400-point rally Friday, Wall Street is more than happy to bid good riddance to a dismal January and spin the dice on things getting better in February and beyond. The first month of the new year was far from a happy one for investors. Doom and gloom prevailed, with major stock indexes like the Dow Jones industrial average, off 5.5% this month, and Standard & Poor’s 500, down 5.1%, posting their biggest January losses since the financial crisis in 2009. It would have been worse had the broad U.S. market not surged 2.5% on the final day of trading due to an interest-rate cut in Japan and strong earnings in the U.S.
By now, the litany of fears that spooked investors and sparked selling are well-known: plunging oil prices; slowing growth in once-booming China; angst surrounding the number of coming interest-rate hikes this year from the Federal Reserve at a time when the global economy is wobbly and investor confidence shaken. History says the January dive could bode poorly for stocks for the rest of the year. The January Barometer — a phrase coined by The Stock Trader’s Almanac, which states that “as the S&P 500 goes in January, so goes the year” — has a strong accuracy rate of more than 75%.
Also worth noting is that February has a history of “flat” performance for the blue-chip stocks in the Dow, according to Bespoke Investment Group. In the past 100 years, the Dow has risen just 0.1% on average in February, ranking 11th out of 12 months. Still, while Wall Street pros debate whether the final correction low has been put in, and most money managers see continued volatility ahead, there is also a silver lining when stocks crater as much as they did in January.
“What is happening is the market is repricing for a slower growth pattern,” says Ernie Cecilia, chief investment officer at Bryn Mawr Trust. And although Cecilia thinks this process could drag on for three to six months longer, he isn’t sending an apocalyptic message. “At this point, we don’t see the pre-conditions for a bear market (or drop of 20% or more).” The good news is the big sell-off has made the stock market less expensive. What Wall Street wants is clarity on the headwinds that are keeping traders up at night, says John Jares, senior portfolio manager at USAA Investments.