In my December post, I pointed out that seasonally, the stock market performs much better from November to April than it does from May to October. Studies performed by Stock Trader’s Almanac, going back to 1950, show that the market was up 51 times during this six months and down only 14 times with an average gain of 7.54 percent and correct calls 80 percent of the time.
This November-to-April period is not shaping up this way. Yale Hirsch devised the January barometer in 1972. The overall theme of the barometer is that as the month of January goes, so goes the year. This time around, we have had four seasonal indicators provide negative results:
1. No rally of the stock market during the last two weeks of 2015 (Santa Claus rally).
2. January’s first five days were negative.
3. The Dow Jones industrial average had a lower close in January than it did in December.
4. January had a negative return.
Since 1950, this is only the eighth time that all four items were negative. Of the seven times prior to this year, February was up just twice. The remainder of the year showed mixed results with an overall negative average return.
All this suggests this time we will not have a strong November-to-April period and odds are the remainder of the year could be weak as well. The markets are currently trying to digest three main concerns — the world heading into a recession, China’s currency effectively becoming an international currency and low oil prices are causing sovereign wealth funds to sell assets.
Regarding the world economy, the latest global economic data, including leading indicators, purchasing managers indexes and consumer sentiment, all show signs of stabilization. The U.S. economy is growing slowly, but with little indication of a recession developing here.
The International Monetary Fund announced in December that it will include China’s currency, the renminbi, as part of its basket of reserve currencies. It will join the U.S. dollar, euro, Japanese yen and British pound as the fifth currency to have this distinction. This is to take effect in October. In preparation, China needs to allow its currency to freely trade on world markets. As it is implementing moves to do so, the currency has become more volatile. Logic would suggest this is to be expected, but a combination of China’s slowdown in growth, the volatility of the currency and a large reduction in its foreign reserves has many investors uncertain and expecting the worst.
Low oil prices are a tremendous benefit to most people around the world, unless you are a citizen of one of the major oil-exporting countries. All of these countries have built their government budgets based on assumptions of much higher oil prices. With oil trading at near $30 a barrel, they are all facing major deficits.
Over the years, most of these countries built up investment funds (sovereign wealth funds) from the excess profits they made when oil was trading at much higher prices. Now, to cover their deficits, they are selling assets from these funds to make up the difference. According to the Sovereign Wealth Fund Institute, funds created from oil and natural gas enterprises represent approximately 56 percent of all such funds in the world. I think this is one of the main reasons weak oil prices seem to create more selling in world stock markets.
While we do not think the world or the U.S. is heading toward a recession, we do think the uncertainty of China and low oil prices will be with us for some time. If you are concerned about where this can lead, consider moving part of your stock portfolio to a defensive sector, such as utilities. By using an exchange-traded fund like the Utilities Select Sector SPDR ETF (ticker: XLU), investors can take advantage of the seasonal strength utilities tend to show after a weak January effect. You will receive approximately a 3.4 percent dividend and some regulated growth going forward. The U.S. 10-year Treasury bond currently only pays 1.71 percent, so the utility sector is providing double the yield.
Disclosure: As of this writing, Bob Phillips and his clients own XLU.
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The January Effect and Market Worries originally appeared on usnews.com