Kicking off 2021

12/31/20
  • January a bullish month on average
  • Returns not exceptional in recent decades
  • Current market themes likely to outweigh any seasonal tendencies

It seems like everyone’s been looking forward to closing the books on 2020 for—well, what seems like forever. After today’s shortened trading session, we’ll get our wish.

That means it’s time to think about what January may bring for the stock market. By reputation, of course, it’s supposed to usher in bullishness—a burst of New Year’s enthusiasm or, if nothing else, the re-establishment of positions that may have been closed out for tax purposes before the end of the previous year.

The market doesn’t automatically dump a rally (or a sell-off) in your lap just because the calendar has flipped to a new month.

As usual, the reality is a bit more complicated. Here’s a snapshot of January’s stock market performance over the past several decades:

1. The SPX has gained ground in 36 of 61 Januaries since 1960 (59% of the time)—only the sixth-best winning percentage of all the months of the year.

2. Over the past 20 years, that win rate dipped to 50%.1

That doesn’t sound too impressive. In the most recent 10 years, though, the SPX has had six up Januaries and four down ones (including last year), and its average gain (1.5%) was actually a little better than its long-term average (1.1%). And the average up January during this span (+4.5%) was significantly bigger than the average down January (-3%).

The message: Seasonal tendencies can be helpful information to have in your hip pocket, but experienced traders know that the things that drive markets change from year to year (and month to month), often in ways we don’t expect—2020 being a crystal-clear example. The catalysts at hand are what matter.

In other words, don’t expect the market to automatically dump a rally—or a sell-off—in your lap just because we’ve flipped to a new month on the calendar. Smart traders “listen” to what the market is telling them, and act accordingly.

 

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1 Reflects S&P 500 monthly price data from 12/30/59–1/31/20. Supporting document available upon request.

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