Watch the “January Barometer”

01/20/2012 3:00 pm EST

Focus: STOCKS

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Market action in January has a heavy impact on the rest of the year, says Jeffrey A. Hirsch, discussing what to expect in 2012, which is also the final year of this Presidential cycle.

What’s ahead for 2012? Let’s ask Jeffrey Hirsch. Jeffrey, I know you’ve done a lot of work on the January barometer and the Presidential election cycle, both of which are staring us in the face. Give us your thoughts.

This is true. Our January barometer says that as January goes for the S&P, so goes the year. 

We see a lot of things combine in the month of January: we get State of the Union Address, we get new Congress taking off, we’ve got Congress re-convening. There’s also a lot of forecasting that goes on on Wall Street. It’s really an indicative month. 

Without the 20th Amendment to the Constitution, which moved the inaugurations and the lame duck Congress—people taking office from the 13 months later in December to that January right after—we wouldn’t have the January barometer. 

So people who go back earlier than the lame duck men, which took effect really in 1938, they’re not looking at anything that’s relevant. This is an event-driven thing. 

So we look at January for an idea, and it’s been pretty accurate. Even if you take the flat years, up or down, plus or minus 5%, we still have about a 75% accuracy ratio that the January barometer forecasts the direction for the year.

Plus, we’re coming into an election year, which is the second-best of the four-year cycle. The long-term average is about 4%, 4.2%, 4.3% for the Dow. Not as good as the third year—and it looks like we’re on pace to keep the streak going of no losing pre-election years since 1939, war-torn ‘39 when German tanks were rolling into Poland. That was the last losing third year of the term. 

There’s another interesting thing that I’ve looked at recently: we have a sitting President running for re-election.

Now this has happened 19 times since the beginning of the Dow in 1896. Of those 19 times, 14 of those years have been up. The average has been 9% per year for the election year, so that’s a positive thing. We’re at a 9% average.

What we see with a popular President is positive movement, especially in the early part of the year, and gains; but if there’s even an unpopular President, somebody who the people really aren’t behind, there’s a celebration rally after they get ousted and somebody else has been elected. 

So either way, there’s a positive influence for the stock market. Of the five losing years, only two of them have been greater than 5%.

What two years were those?

1932, when the Depression set in, and 1940, when World War II was raging in Europe. So that gives me some encouragement for 2012.

Because we don’t see that type of situation formulating right now.

No, we don’t. There are issues: the financial crisis is still brewing, the sovereign debt issue, we have the debt battle going on here. That’s going to loom large. 

We’ll probably keep stock prices from breaking out to new all-time highs, but I think there’s a rally in this year, and I think we could probably reclaim that 12,700 level that we fell off of in July.

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