Simple Indicators in a Complicated World

We don't place any value on market folklore like the "January Effect" or the "Super Bowl indicator," but we are often asked about them during this time of the year. Jittery investors are looking for clarity in an environment where little is certain. We're revisiting these indicators this year to remind investors that they only appear to have stood the test of time.

However, since 1998, the Super Bowl indicator has had a poor record; it has been correct less than half of the time. The most notable failure was the New York Giants' (NFC) upset win in 2008 over the New England Patriots (AFC), which if theory held, predicted a bull run for stocks. Instead, stocks plunged that year as the financial crisis took hold. This year's win by the Kansas City Chiefs on February 11 was widely watched, but not for its forecasting ability.

As January goes, so goes the year according to this market adage. It is true that January has more consistently indicated the direction of the stock market for the year than any other month. When the MSCI World Index has posted a positive return in January, the year as a whole ended with a gain 79% of the time since 1969, when the index began.

Again, this sounds impressive, but when January was negative, the year suffered a loss less than one-third of the time. It seems January doesn’t really have much of an “effect.”

This popular piece of market folklore says that the direction of the stock market during the first five days of the year determines whether the world's stock markets will be up or down for the year. The support for this indicator comes from the fact that over the past 44 years, full-year gain followed in 19 of the 24 times the first five days of January posted a net gain for the MSCI World Index—at first glance a 79% accuracy level. But is it significant? Not very. Here are two things to keep in mind:

• The MSCI World Index has posted a gain for the year more than 70% of the time, no matter what the first five days have done.
• A decline in the first five days has been accurate only about 25% of the time at predicting a down year.

If the world's most famous forecasting groundhog, Punxsutawney Phil, sees his shadow we are expected to get six more weeks of winter. If he does not, it's predicted that the cold gives way to an early spring. A lesser-known prediction that accompanies seeing his shadow is for a gain in the stock market. When Phil has seen his shadow, temperatures have been colder than usual in the U.S. 47% of the time since 1969—a statistical coin flip. However, is he much better at predicting stock market performance? Stocks around the world (MSCI World Index) have been up 72% of the years Phil has seen his shadow. This year, on February 2, he did not.

Of course, the fact that the stock market has posted a positive total annual return 74% of the time since 1970, whether Phil saw his shadow or not makes Phil's stock market prediction about as useful as his weather prediction.

2024 is the year of the dragon in China, South Korea, Taiwan, and Vietnam. A look back at average annual world stock market returns by Chinese zodiac sign shows us that the year of the dragon has been close to the average in terms of performance.

However, there have only been four prior years of the dragon since the inception of the MSCI World Index and the return for the MSCI World Index has been mixed: 1976 +10%, 1988 +21%, 2000 -14%, and 2012 +13% demonstrating the lack of a substantial basis for any accuracy claim for this indicator of market performance.

• Purchasing Managers' Index – S&P Global produces this monthly leading indicator that may signal a shift in economic and market leadership in 2024 as a potential recovery follows 2023's manufacturing recession while the strong service sector of 2023 weakens. The preliminary reading for each month by economy comes out around the 20-25th of the month, while the final reading for the global manufacturing index in aggregate is produced on the first day of every month covering most major countries.
• Global Supply Chain Pressure Index – The New York Federal Reserve's monthly comprehensive measure of potential supply chain disruptions derived from shipping costs and delivery times can help gauge any potential inflationary impact stemming from weather- and conflict-related trade disruptions. The index is updated on the fourth business day of each month.
• Consumer price index – The U.S. Bureau of Labor Statistics and similar agencies in other countries produce this monthly measure of inflation. Policymakers around the world are watching inflation closely to ensure it continues to trend sustainably towards the 2% target adopted by the world's major central banks.
• Equal-Weighted Index – Most stock market indexes are capitalization-weighted, where the biggest stocks have the biggest weighting in the index and the biggest impact on index performance. But most also have an equal-weighted index counterpart, where each stock gets an equal weighting, providing a measure of what the average stock is doing rather than merely a handful of the largest ones. In general, the greater the number of stocks that are helping push the overall market higher, referred to as market breadth, the more support the market has.
• Yield curve – The government bond market tends to signal a global recession when short-term yields rise above longer-term yields, referred to as an inversion of the yield curve. The bond markets of all but one of the Group of Seven countries (Canada, France, Germany, Italy, Japan, United Kingdom, United States) had inverted yield curves in 2023 (the exception being Japan) and only one of them, the United States, avoided having at least one quarter of zero or negative GDP growth last year. A return to a more normal, or upwardly sloping, yield curve in 2024 may signal a brighter outlook for economic and earnings growth.

The enduring popularity of market folklore for investment decision making—despite their history of an at best coin-flip accuracy when examined closely—is a testament to the very human desire for an easy answer on how to invest in today's interconnected and complex markets. The truth is, no indicator provides a guarantee of future performance, which is why diversification, and a long-term perspective are so important to achieving investment goals in the stock market.