riddance to January ó the month that wiped out a chunk
of money youíve been building up in your 401(k) and
how bad was it? Very bad for an opening to the year.
January typically is a time of optimism. But not this
was one of the worst in recent history, with a decline
more than 6 percent for the Dow Jones industrial average
and almost 9 percent in the Nasdaq, the index filled
with technology and biotechnology stocks.
rally during the last couple of days helped relieve
losses. Still, a common Wall Street adage has to be
unsettling: "As goes January, so goes the
other words, the first month of this year looks like a
bad omen for whatís to come yet in 2016. But should
you believe it, or worry that a bear market is on its
investors believe that the equity market volatility will
not be subsiding anytime soon, and that even lower lows
for the S&P 500 lie ahead," said Standard &
Poorís analyst Sam Stovall, who tracks historical
data. "The next obvious question is: Should the
S&P 500 slip into a bear market, how far will it
fall, and how long will it last?"
looks to history for an answer. He found that since
1946, when the S&P 500 was down in January, the full
year ended down in the majority of years ó 56 percent
of the time to be precise. That means 44 percent of the
time a miserable January was not a bad omen.
a disappointing January did not necessarily mean a bear
market was coming. Bear markets, or plunges of more than
20 percent that spook investors for several months, were
not inevitable. On the other hand, the year-end results
werenít good during the majority of the bad-January
years. The average decline was 3.2 percent.
troubling is Stovallís research into periods of very
sharp declines in January. When the S&P 500 dropped
4.6 percent or more during the first month of the year,
two out of three years delivered losses. The average
loss: 6.1 percent.
the stock market plunged so sharply early this year,
investors have been wondering if this is the beginning
of a monster bear market, like late 2007 to early 2009,
when the stock market dropped 57 percent. Yet, many
analysts say that if the current stock market plunge
becomes a bear market, it probably wonít be as serious
as that terrifying drop because then the financial
system was poisoned. Now, banks are considered
healthier, although investors do worry about failing oil
businesses infecting junk bond market losses. That could
make lenders cautious and slow down the economy ó one
of the problems in 2008.
than worrying about a repeat of 2007-2009, Stovallís
research provides some hope for people caught up in the
January adage. In January 2009, the S&P 500 lost 8.6
percent, the worst decline on record for the month. Yet,
despite widespread fear about the recession and bear
market, investors started bargain-shopping in the stock
market in March 2009 and stocks climbed sharply.
the end of the year, the S&P 500 had climbed over 23
percent, said Stovall. That still didnít calm
investors, who remained wary of any downturn for the
next couple of years. Yet, there were enough daring
investors buying stocks to propel a sharp rise in the
some investors are worried the stock marketís
unnerving behavior is an early indicator that the
slowing global economy is going to put the U.S. back
into a recession.
stock market plunges predict recessions?
analysts recently have tried to calm investors by
explaining that stocks couldnít possibly be headed
into a bear market because the economy is not in a
recession. They claim that all bear markets happen in
recessions, not when the economy is OK.
Stovallís research suggests those analysts have the
time frame somewhat misinterpreted. Stovall notes that
every time there has been a recession in the U.S. since
1948, the stock market plunged months before the
recession occurred. A stock market plunge of at least 10
percent predicted trouble coming in the economy. The
prediction started on average 7 1/2 months before the
start of the recession.
you incorporate the stock market decline that occurred
before the recession and the decline during the
recession, the average drop in stocks has been nearly 30
percent, Stovall said.