Chart of the Week: Is the US Stock Market Heading for a 2022 Decline?

February 4, 2022

A roller-coaster ride for the US stock market at the start of 2022 concluded with a two-day relief rally.

However, the S&P 500 Index (“S&P 500”) and tech-heavy Nasdaq-100 Composite Index (“Nasdaq”) still recorded their worst January declines since the Global Financial Crisis (GFC).

The S&P 500 was down by 5.3% in January this year, its worst January performance since January 2009 – when the bellwether index declined by -8.6%.

Meanwhile, the Nasdaq only narrowly avoided its worst ever January performance this year as the tech-heavy index fall by -9.0%. In January 2008, the Nasdaq was down by 9.9%.

January Barometer does not mean a bear market

The “January Barometer” is a market theory that believes the returns in January predict those for the rest of the year.

It is popular among some stock traders and was first introduced in the Stock Trader’s Almanac back in 1967.

Here is a look at the how accurate the January barometer has been since 1985.

Over the last 34 years, the “January Barometer” has been shown to be accurate, on average, about 65% of the time. To be exact, the January Barometer is accurate at 62.2% for the S&P 500 and 67.6% for the Nasdaq.

However, this might be largely illusory. After all, between 1985 and 2021, both the S&P 500 and Nasdaq have generated a positive annual return roughly about 75% of the time.

Therefore, the January Barometer could merely be a secondary effect of the general tendency for the US stock market to move higher each year.

In fact, when we look at the 14 times when the S&P 500 fell in January between 1985 and 2021 period (see below), only five of those periods saw a full year decline for the benchmark index.

Look at fundamentals of companies

The stock market usually starts with a certain narrative at the beginning of the year as investors, analysts and business leaders try to predict the key risks and thematics.

However, these short-term narratives change as the year progress with new developments, economic data and risks emerging.

For example, most market analysts predicted and called for the tapering by the US Federal Reserve’s (Fed) balance sheet since Ben Bernanke’s time as the chairman of the Fed.

It has been almost eight years since Bernanke was Chairman, replaced by Janet Yellen and the head position is now under Jerome Powell.

The US Fed’s balance sheet has grown to nearly US$8.5 trillion in September last year as compared to just US$2.5 trillion in October 2014.

Another key theme for the year is inflation, as the oil price has flirted with the idea of breaching US$100 per barrel and the logistic bottlenecks continue to drive costs higher. Shortages of chips is also another concern.

However, just as with any other investment narrative, market analysts were talking about the demise of the oil & gas industry back in 2020 with the oil price falling substantially.

Investors need to realise that short-term investment narratives change as new developments emerge.

Media coverage focuses on the latest headlines and developments but none of these reflect the fundamentals of companies.

If you are worried about the share price of the company over the next year, perhaps it might not be the right fit for you.

Perhaps a good takeaway from the “Oracle of Ohama”, Warren Buffett, would be the best way to end this week.

“If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.”

Source: Yahoo Finance, ProsperUs

Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.

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