As January Goes ...

Market performance in the first month of the year doesn't always foretell the year's results

By Joseph Lisanti

January was cold in the eastern half of the United States, and nowhere was it colder than on Wall Street.

The S&P 500 finished the month off 2.7%, which sends shivers down the spines of those investors who believe that January is an indicator of the whole year's direction.

Does the first month really herald the market action for the full 12 months? If it does this year, maybe bulls should go into hibernation instead of bears. In truth, an up market in January is a better predictor of the rest of the year than is a lower first month.

In the years since the end of World War II, the S&P 500 has finished the year higher 86.8% of the time when January saw better stock prices. The results since 1982 show remarkable consistency with the postwar trend; 86.7% of the time an up January meant a higher full year for the "500."

When January is a losing month for the index, however, the ensuing market direction is not as predictable. In the postwar era, a drop in January presaged a full-year decline 65% of the time. More recently, the usefulness of a market drop in the first month as an indicator of the whole year has diminished. Since 1982, a decline in the S&P 500 in January has led to a full-year drop only 50% of the time -- no better than a coin toss. That might be good news this year.

We still look for the market to trend higher by the end of 2003. Right now, that could be a little difficult to imagine. But the effects of fiscal and monetary stimulus should be evident later in the year.

Meanwhile, many businesses and consumers are deferring spending as they await a resolution of the current impasse with Iraq. Keep 65% of your investment assets in equities, which should rise after the Middle East settles down.

Lisanti is senior editor of Standard & Poor's weekly investing newsletter, The Outlook