Market Insights: Is the January Barometer Broken?

Macroeconomic and Market Developments:

• North American markets were higher for the second consecutive week. In Canada, the S&P/TSX Composite Index was up 2.61%. In the U.S., the Dow Jones Industrial Average rose 1.05% and the S&P 500 Index increased 1.55%.
• The Canadian dollar was flat this week, closing at 78.33 cents vs 78.30 cents last Friday.
• Oil prices were strong again this week. U.S. West Texas crude closed at $92.11 vs $87.25 USD last Friday, its highest level since mid-2014, and the Western Canadian Select price closed at $78.37 vs $74.29 last Friday.
• The gold price was positive this week, closing at $1,808 vs $1,790 USD last Friday.
• U.S. software company Citrix Systems (CTXS) is being taken private by Elliott Investment Management and Vista Equity Partners for $13 billion or $104/share in cash. The offer is a 30% premium to the company’s closing share price on December 7th, before market speculation emerged about a deal. Also, in yet another gaming deal, Sony (SONY) announced a $3.6 billion acquisition for privately held video game developer Bungie. The company is the developer of popular games like Destiny and Halo, and was bought by Microsoft in 2000 (to develop games for its Xbox console) before spinning the company off in 2007.
• More large tech companies reported earnings this week. After the market closed on Tuesday, Alphabet (GOOGL) reported earnings of $30.69/share vs $27.34 expected and revenue of $75.33 billion vs $72.17 billion expected. The company also announced a 20-for-1 stock split that will go into effect in July. After the market closed on Wednesday, Facebook’s parent Meta Platforms (FB) disappointed with earnings of $3.67/share vs $3.84/share expected on revenue of $33.67 billion vs $33.40 billion expected. And after the market closed on Thursday, Amazon (AMZN) reported earnings of $27.75/share on revenue of $137.4 billion vs $137.6 billion expected, and announced a gain of $12 billion on its investment in electric vehicle maker Rivian (RIVN).
• As mentioned above, Meta Platforms, parent of Facebook, Instagram and WhatsApp, disappointed markets this week. On Thursday, the stock dropped an incredible 26.39%. Meta’s $237.6 billion one-day decline set a record for the largest one-day value drop in stock market history. The previous record for amount of market capitalization lost in one day was Apple’s $182 billion loss in September 2020.
• Canadian GDP rose 0.6% in November, beating estimates of a 0.4% rise. Statistics Canada noted that real GDP for December was essentially unchanged indicating a 1.6% gain in the fourth quarter of 2021 and a full year increase of 4.9%.
• The U.S. ISM Manufacturing Index declined to 57.6 in January, narrowly beating the expectations for a 57.5 reading (levels higher than 50 signal expansion; levels below 50 signal contraction). The major measures of activity were mixed in January, but all stand above 50, signaling growth. The ISM Non-Manufacturing (Services) index declined to 59.9 in January, above the expected 59.5. The major measures of activity moved mostly lower in January, but also all remain above 50.
• Employment numbers were released on Friday in North America. In Canada, our economy lost 200,100 jobs in January compared with the expected loss of 110,000, with the unemployment rate rising to 6.5% from 5.9%. In the U.S., nonfarm payrolls increased by 467,000 jobs in January compared with the 150,000 expected, while the unemployment rate increased slightly to 4.0% vs the 3.9% expected.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Reflex Rally and our Game Plan: DWYER VLOG

Weekly Diversion:

Check out this video of babies riding Roombas.

Charts of the Week:

There is always a lot of chatter after January in the investment community about an indicator called the ‘January Barometer’, especially when the month is down month like it was this year. There is an old saying ‘so goes January, so goes the rest of the year’ that essentially means if January has a negative return, the rest of the year will not be a fruitful one for equities. While it may be true that a weak January can result in a full year’s return being lower on average than years with a strong January, simply abandoning the market based on this indicator has been an extremely poor move, most notably outside a recession which we are currently not in, and especially of late. If we look at the last 20 years, one could say that perhaps the January Barometer is broken? As you can see in the table below, of the past 10 times that the S&P 500 was down in January, the final 11 months were positive nine of those times and were exceptionally strong. In fact, if we remove 2008 (which was a recession year that we view as an extremely low probability event this year), the average return on the other nine years over the final 11 months was over 18% and positive 100% of the time.

Source: Ryan Detrick, CMT, LPL Research

Corrections are a normal and healthy part of markets, and this time is likely no different. The important thing to remember is that time in the market is more important than timing the market, and the following chart illustrates how little corrections affect the long-term positive trend and how little impact short-term timing can have. With the S&P 500 officially moving into correction territory (over 10% drop) last week for the first time in a while, the below table shows how the market since 1928 has performed over the following 1-year and 5-year periods after this event. It essentially shows how the S&P 500 has performed if someone bought the index every time it first closed in correction territory versus buying it on any given day throughout history. Clearly, buying after a 10% correction is optimal in the short-term (1 year), but that timing has essentially no effect on the long-term median return. This is a helpful reminder that while corrections can be unnerving in the present, they are common, and they are certainly no reason to give up on equities for the long-term.

Source: Bespoke Investment Group

Sources: CNBC.com, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, LPL Research, Bespoke Investment Group