By Jonnelle Marte
Does the combination of the start of the Iowa caucus today and stocks kicking off 2012 by jumping more than 200 points mean the markets will have a red-letter year?
It does for investors who believe in the “January barometer,” the Wall Street notion that – particularly in presidential election years – the market’s performance over the first five days can forecast the rest of the year. There’s some evidence to support the idea, but not all analysts think how a year starts has any impact on how it ends.
The impact of the January on the rest of the year does seem heightened during election years, according to research from S&P Capital IQ. “The first five trading days of the month serve as early warning signals,” Sam Stovall, chief equity strategist for S&P Capital IQ said in a written commentary.
The barometer is especially accurate at pinpointing up years. For instance, the January Barometer was correct eight out of eight times in predicting positive year performance during presidential election years, according to S&P. But the indicator tends to say less about down years — when the market has dropped in January, annual performance only followed suit half of the time.
Markets might hint at annual gains if today’s rally continues. But advisers warn against making investment decisions based off of the market’s early performance. Stock markets are likely to remain volatile for at least the first half of the year as uncertainty over Europe hangs over investors’ minds, says Scott Wren, senior equity strategist for Wells Fargo Advisors. “You’re likely to have some bad headlines and that will likely contribute to the volatility,” says Wren.
Investors may be better served looking at the economic reports released this month, such as manufacturing data and unemployment claims, says Wren, who thinks investors might be emboldened by data that shows a reduced risk of recession in the U.S. Wren says he is investing more heavily in defensive stock sectors for the first half of the year, such as health care and consumer staples, which should be less volatile than the overall stock market. He plans to reduce exposure to those areas and invest more in aggressive sectors, like industrials and materials, going into the second half of the year if investors begin to regain confidence in Europe.
Another reason why experts might be watching stock performance closely during election years: history shows that markets might hint at who will take the victory in November. A rise in the S&P 500 from August through October traditionally leads to the re-election of the incumbent president, according to S&P Capital IQ, while a drop has typically led to a new commander-in-chief.