Lately I hear that the annual stock market price trends tend to repeat the month of January price movement.
I believe that history is philosophy teaching by example. That, in a nutshell, summarizes why history is relevant. Knowledge of market ups, downs and sideways movements in the past allows the investor to have a perspective of how drastic, or not, market swings can be.
However, if we look at the potential of the above example of the “January” effect as a “warning” or a “tell” on where the markets are heading then why not further examine long-term historical trends? Why just rely on the short-term outcome of events?
I too, believe that 87 years are sufficient data points to draw conclusions from. However, I think the “tell” of the January effect is kind of silly.
To me, a more relevant question is what has been the correlation between the annualized “since inception” return on the S&P 500 each year from 1926-2013 vs. the 20 year annualized return.....continued....
....continued.....The answer is: the annualized since inception return (from 1926) on the S&P is now 10%. Where as the 20 year annualized return is 9.3%. Historically, the correlation between the two shows that the 20 year annualized return has not dropped significantly below the “since inception” (from 1926) annualized return. I don’t know what the 2014 return will be, but my educated guess is that market prices will be much higher than today 3 to 5 years from today. If you examine the correlation between the 20 year time frame vs the since inception period returns, one can determine that the data provide a comprehensive idea of fair market levels over time.
So, how is this historical data relevant? My point is simple, next year’s return might not prove to be as crucial because we will be dropping the 1994 return from our 20 year calculation (1.32% return in 1994). However, where it gets interesting is from 2015 and on. When chartists will start looking at the 20 year annualized returns vs the since inception annualized returns. (the 20 year annualized return will drop sharply, unless we are able to frontrun the 38%, 23%, 33%, 29% and 21% returns from 1995-1999) This is probably one of the most relevant aspects to study and understand. So to me, it is better to further analyze long trends. Not the months following the January phenomenon…