Why seasonal factors predict a banner year for stocks in 2020
In the 2020 Stock Traders' Almanac, the authors point out that "S&P gains January's first five days preceded full-year gains 81.8% of the time." They call this the "First Five Days" effect. This year, January's first week produced a gain of about 1%, so based on the historical pattern, we should expect the full year to be an up year.
The authors also write that when the market gets a strong Santa Claus Rally, a positive "First Five Days," and a positive full month of January, then the full-year gain of the S&P 500 averages over 17%. So far, 2020 is on track for that trifecta of bullish indicators. Unless we get a very significant correction at the end of January, we should have a great year in 2020.
Why do these barometers work? Because the end of December and beginning of January are when many companies issue full-year guidance, and it's also when the major investment banks and analyst firms do a lot of their forecasting and release earnings estimates for the year. This short period can produce major revisions of the market's expectations and major reallocations as investors immediately start taking the new information into account.
The market is also boosted this year by the fact that it's an election year with an incumbent running for president. "Since 1949 the Dow is up 10.1% in election years when a sitting president is running for reelection vs. 5.3% in all election years." That's because incumbents manipulate markets for their political advantage, as Trump has done by lowering interest rates to stimulate massive borrowing.
More specifically, here's what to expect: the couple days after MLK Jr. day tend to be weak, but then the rest of January is typically solid. February, however, often sees a pause or a significant correction from January highs. Given the high multiple the S&P 500 is currently trading at, I'd hazard a guess that we see a small correction in February before the market resumes its uptrend in March.
The authors also write that when the market gets a strong Santa Claus Rally, a positive "First Five Days," and a positive full month of January, then the full-year gain of the S&P 500 averages over 17%. So far, 2020 is on track for that trifecta of bullish indicators. Unless we get a very significant correction at the end of January, we should have a great year in 2020.
Why do these barometers work? Because the end of December and beginning of January are when many companies issue full-year guidance, and it's also when the major investment banks and analyst firms do a lot of their forecasting and release earnings estimates for the year. This short period can produce major revisions of the market's expectations and major reallocations as investors immediately start taking the new information into account.
The market is also boosted this year by the fact that it's an election year with an incumbent running for president. "Since 1949 the Dow is up 10.1% in election years when a sitting president is running for reelection vs. 5.3% in all election years." That's because incumbents manipulate markets for their political advantage, as Trump has done by lowering interest rates to stimulate massive borrowing.
More specifically, here's what to expect: the couple days after MLK Jr. day tend to be weak, but then the rest of January is typically solid. February, however, often sees a pause or a significant correction from January highs. Given the high multiple the S&P 500 is currently trading at, I'd hazard a guess that we see a small correction in February before the market resumes its uptrend in March.
