The stock market's slide in the first month of 2009 could challenge the widely held Wall Street aphorism of, "As January goes, so goes the year," says the editor of the book touting the indicator. The S&P 500 is down more than 7% on the last trading day in January, which signals bad news for investors who put faith in the Stock Trader's Almanac. The book has since 1972 published the January Barometer, which has predicted the S&P's direction with stunning accuracy for more than half a century. But editor in chief Jeffrey Hirsch says the barometer may prove poorly calibrated this year. "You tend to think that '09 has got a pretty good shot, despite the gloom and doom out there in the world," he says. Hirsch says that although the S&P's January decline tempers his predictions for the year, "we still think the market's going to rebound." A January that fails to predict the remainder of 2009 would certainly be an aberration. The barometer has been right 91.4% of the time since 1950, failing to predict the S&P 500's direction only five times in the period. The indicator's accuracy still stands at 74.1%, if one counts years where the S&P 500 moved less than 5% in either direction as a miss. Hirsch is quick to point out that he bases his overall market predictions on more than seasonality. He cites 2008's sharp declines and unusually high put-call ratios as indicators of a 2009 recovery. Furthermore, he says uncertainty about the actions of the Obama administration has likely held the markets back this January, and additional clarity on that front may bring about a rally later in the year.
"Nothing is perfect, the January Barometer included," he says. Hirsch's father Yale established the Almanac in 1966, and six years later discovered apparent relation between the market's January performance and its year-end fate. The Almanac attributes the effect largely to the 20th Amendment, passed in 1933, which moved the meeting of Congress' newly elected members and the presidential inauguration to the first month of the calendar year. Thanks to that amendment, many of the important policy and economic decisions that will influence the coming year occur in January, creating a connection between the market's January reactions and the trend for the broader year. Although the indicator has demonstrated high predictive power over the past half century, Wall Street analysts are skeptical. "Actually, I take that, combine it with the logarithmic result of the Super Bowl, and come up with my forecast for the year," jokes Jack Ablin, chief investment officer at Harris Private Bank. Ablin says that the January Barometer focuses on too short a time frame. "It's something to consider, but I don't have enough confidence in it to stake my strategy on it," he says. Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, says that while the January Barometer's winning percentage is impressive, it cannot be counted on as a trading strategy. "Blindly follow that? Of course not," he says. Unlike Hirsch, he views January's downward close as a confirmation of his pessimism. "You have to be open to the fact that this bear market is not over," he says.
A down January is just one reason among many to be bearish. The economy is in tatters, as uncertainty reigns about the Obama administration's stimulus efforts. On Thursday, Starbucks ( SBUX - Get Report), Eastman Kodak ( EK) and Allstate ( ALL - Get Report) all reported fourth-quarter losses and announced layoffs. Industrial bellwether Caterpillar ( CAT - Get Report) and fellow Dow Jones Industrial Average components AT&T ( T - Get Report) and Home Depot ( HD - Get Report) also have announced layoffs this week. Friday's report that fourth-quarter GDP shrank 3.8% paints an equally despondent picture. In the face of all that news, and a downbeat reading from his own indicator, Hirsch nonetheless hopes for a 2009 recovery. "As an investor and as a person that lives here, I really hope it is a year that January's wrong," he says.