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Does January's Stock Slide Portend a Down Year?

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What You Need to Know

  • DataTrek co-founder Nicholas Colas provides some historical food for thought.
  • Much will depend on whether Fed policy pushes the economy into a recession.
  • The Fed is expected to raise rates three or four times this year in an effort to reduce inflation.

For the U.S. stock market, January 2022 is turning out to be the second worst-performing January in 42 years.

Whether the weak performance portends a negative full year for the market likely depends on whether the U.S. economy slips into recession, which, in turn, depends on Federal Reserve policy. That’s the belief of Nick Colas, co-founder of DataTrek Research, which publishes a daily guide to markets and data.

“History shows that despite a particularly poor performing January for the S&P, it can bottom early in the year if a) the U.S. does not enter recession amid headwinds or b) the federal government passes meaningful fiscal stimulus. … The latter is unlikely especially with midterm elections later this year, so it’s up to the Fed to not let the U.S. economy tip into recession as they raise rates this year,” Colas writes in a recent report.

While Colas does not fully embrace the idea that the performance of the S&P 500 in January predicts the general direction of the market for the full year, he notes that when the index falls in January, performance for the full year lags compared with the performance in years when January is positive.

Since 1980, the average annual return in the S&P 500 following a negative January is 3.6%,  compared with 15.5% for years when January is positive, according to Colas. If January 2008 — during the Great Recession — is excluded from the calculation, the average annual return after a negative January is 6.2%.

Year-to-date, the S&P 500 is down more than 7%, with three more trading sessions to go before month’s end. That’s a bigger drop than four of the five worst-performing Januarys since 1980, which are, in addition to 2008’s 6.1% drop, January 1990 (-6.9%), January 2000 (-5.1%), January 2009 (-8.6%) and January 2016 (-5.1%).

The S&P 500 finished three of those years in negative territory — 1990, 2000 and 2008. The economy fell into recession during two of them — 1990 and 2008 — and weakened in the third — 2000. The Fed raised rates that year to reverse what Fed Chairman Alan Greenspan termed “irrational exuberance” in the stock market; a recession followed in 2001.

The Fed is expected to raise rates three to four times this year in an effort to reduce inflation.