January Barometer sinks January Barometer sinks http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\barometer-old-small.jpg February 8 2022 February 9 2022

January Barometer sinks

Midterm election years are particularly challenging.

Published February 9 2022
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Bottom Line

We were expecting a choppy year in 2022, with significantly greater financial-market volatility compared with last year. Stocks could correct 8-12% over the first nine months or so of 2022 before rallying up to our year-end target of 5,300 for the S&P 500, buoyed by favorable midterm election results bringing divided government back to Washington. Wall Street generally prefers that because it keeps fiscal policy in the middle of the fairway—neither too far to the progressive left nor the conservative right. 

But the S&P plunged 12% in just the first three weeks of January, fueled by the spike in the omicron variant, soaring and sustainable inflation, a decidedly hawkish shift in the Federal Reserve’s monetary policy plans, and growing worries about potentially imminent geopolitical risks in Russia, China and Iran. If it wasn’t for a powerful month-end rally that more than halved the damage, January 2022 would have been the worst month to start a new year in 73 years. Instead, its price-only decline of 5.26% (a total-return decline of 5.17%) was the seventh worst on record. But it still is the S&P’s poorest month since March 2020’s total-return decrease of 12.35% when the global pandemic hit the U.S. with full force, and the worst January since 2009’s 8.6% decline. 

The collateral damage was widespread last month. While the S&P fell 12% to its intraday low on Jan. 24, the technology-laden Nasdaq Composite and the small-cap Russell 2000 both fell 17%, and the Russell 1000 value and growth indexes dropped 9% and 17%, respectively. Benchmark 10-year Treasury yields have surged from 1.50% to around 1.90% so far this year, on their way, we believe, to 2.50% in 2022. The volatility index (VIX) spiked from 16 to 39, though it has improved to 23 over the past fortnight. 

‘January Barometer’ decidedly negative in 2022 Ordinarily, the S&P’s horrific decline during January would auger for a potentially difficult full year for stocks. According to the January Barometer, one of the stock market’s most popular and widely followed rules of thumb, as the month of January goes, so goes the full year. Since 1950, Jeffrey and Yale Hirsch at the Stock Trader’s Almanac report that the performance of the S&P in the month of January—positive or negative—is an accurate directional signal for its full-year performance 72% of the time (52 out of 72 observations). But when January is negative, as it is this year, the odds of a positive full year are essentially a coin flip at 52% (15 out of 29 instances). 

Plumbing the bottom in midterm election years Those 29 negative Januarys declined an average of 3.6%, with full-year performance averaging a drop of 1.1%. But when the index managed to right itself (15 of 29 times), it averaged a 10.8% full-year gain.

In the 18 midterm election years since 1950, the S&P declined an average of 0.7% for that month (excluding this year), but recovered to an average 6% gain for the full year. In the nine midterm election years in which January was negative, it managed to right itself to finish in positive territory five times (56%), averaging an 8% full-year return.

Not out of the woods Despite the powerful rebound in the S&P from its Jan. 24 intraday low, we don’t believe we’ve seen the bottom for 2022 just yet. The cacophony of fundamental headwinds suggests that at a minimum stocks should retrace to hit a double-bottom retest at 4,200 in coming months. But the magnitude of those concerns—headed by the uncertain path of Covid, soaring inflation, an aggressive Fed and geopolitical risks—suggest stocks may fall further to perhaps 3,800, before finding their sea legs. 

As a result, we continue to advocate a defensive investment stance, with a focus on less-expensive stocks and sectors that enjoy lower betas and higher dividend-yield support. We prefer domestic large- and small-cap value stocks, as well as international developed and international small- and mid-cap stocks. 

What are the best sectors to own in 2022? The January Barometer Portfolio indicator also holds that the best- and worst-performing S&P sectors in January tend to follow their performance trend the rest of the year. Here are the 11 sectors, sorted by their total-return performance from Dec. 31, 2021 through Jan. 31, 2022. The results favor relatively cheaper value and defensive stocks with higher dividend-yield support, compared with more expensive growth stocks:

  • Energy:  19.10%
  • Financials:  0.06% 
  • Consumer Staples:  -1.37% 
  • Utilities:  -3.27%
  • Industrials:  -4.73%
  • S&P 500:  -5.17% 
  • Telecommunication Services:  -6.21% 
  • Health Care:  -6.76% 
  • Materials:  -6.84% 
  • Information Technology:  -6.89%
  • REITs:  -8.50%
  • Consumer Discretionary:  -9.68%

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Tags Markets/Economy . Equity . Politics .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio, in comparison to the market as a whole.

There are no guarantees that dividend-paying stocks will continue to pay dividends.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

Nasdaq Composite Index: An unmanaged index that measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq Stock Market. Indexes are unmanaged and investments cannot be made in an index.

Past performance is no guarantee of future results.

Russell 1000® Value Index: Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Investments cannot be made directly in an index.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

The fund may invest in small capitalization (or “smallcap”) companies. Small-cap companies may have less liquid stock, a more volatile share price, unproven track records, a limited product or service base and limited access to capital. The above factors could make small-cap companies more likely to fail than larger companies and increase the volatility of the fund’s portfolio, performance and share price. Suitable securities of small-cap companies also can have limited availability and cause capacity constraints on investment strategies for funds that invest in them.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

VIX: The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility.

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