Do you want to know if the stock market will post gains by the end of the year? You aren’t alone. While past results are no guarantee of future returns, the January barometer by the Stock Trader’s Almanac has a respectable track record for projecting yearly market performance.
The venerable barometer was devised by almanac founder Yale Hirsch in 1972. Simply put, if the Standard & Poor’s 500 index ends January with a gain, the odds favor a rising stock market for the year. But if stocks end January in the red for the month, the bear might finally be coming out of hibernation.
“The January barometer has registered eight major errors since 1950 for an 87.7 percent accuracy ratio,” says Jeffrey A. Hirsch, Yale Hirsch’s son and the current editor of the Stock Trader’s Almanac.
One of the main reasons that stock market action in January sets the tone for the year is politics and the symbiotic relationship between Washington and Wall Street. “When Congress convenes and the president makes the State of the Union Address, Wall Street and the market takes its cues from what the politicians say they will focus their attention and capital on and directs their capital accordingly,” Hirsch says. “If it looks like belts and wallets are tight, money comes out of the market and January is down — it is a sign the year will not be so bullish.”
If the market is down in January, investors can consider a more cautious stance and limit new long positions and tighten stops or sell criteria. “Get rid of underperforming positions and be ready to cut bait if things deteriorate further. On the flip side, if the market is strong in January, investors should consider a more aggressive stance and be prepared to buy dips, enter new longs and stomach deeper drawdowns and looser sell criteria,” Hirsch says.
Investors looking to capitalize on the January barometer results could consider allocating funds toward sectors that analysts expect to outperform in 2016. There are a variety of exchange-traded funds that look to capture overall sector performance and can be a relatively simple move for investors.
Here are four sectors that analysts believe could outperform in 2016.
Health care. This is a big and diverse sector that includes highflying biotech firms, managed care companies and big-name pharmaceutical companies. It has traditionally been considered a defensive sector, but as the baby boomers age, the demand for health care is expected to increase, which has attracted growth and momentum investors. One ETF that tracks this space is the SPDR Health Care Select Sector SPDR Fund (ticker XLV).
“We like health care because of the demographics associated with an aging population, and there have been more breakthroughs in therapy and the biotech sector,” says Ernie Cecilia, chief information officer at Bryn Mawr Trust, based in Pennsylvania. “In the health care sector, we are more inclined toward favoring companies involved in analytics and technology. Two names we like are Thermo Fisher Scientific (TMO) and Becton Dickinson and Co. (BDX). We’re looking for companies that are more focused on instrumentation.”
Information technology. This sector is comprised of a variety of companies, including semiconductors, technology hardware and big social media names. The Technology Select SPDR (XLK) is an ETF that tracks this space. An improving economy and pent-up demand are expected to boost both consumer and business spending in this area in 2016.
“We like the bigger names in technology going forward: Apple (AAPL), Microsoft (MSFT), Facebook (FB) and Google (GOOG). It’s about the growth of the global consumer and global commerce,” says Ron Weiner, president and CEO of RDM Financial Group in Westport, Connecticut. “Undervalued in technology is an ETF we like, which is HACK. It’s down almost 25 percent from the highs. If you want to play in the small technology basket, that’s a good one to play.”
Financials. This sector includes big money center banks, insurance companies, mortgage finance companies and regional banks. Analysts point to expectations for a rising rate environment in 2016 as a positive factor for the financial sector. ETFs for this space include the Financial Select Sector SPDR (XLF).
“We like financials, specifically interest rate-sensitive equities like banks. We have increased our exposure and are market-weighted in banks to prepare for rising rates. It’s a function of net interest margins and loan demand,” Cecilia says.
Consumer discretionary. This is a broad-based sector that includes categories such as apparel, autos, consumer electronics, department stores, home improvement stores, hotel, restaurant and retail Internet companies. This sector posted gains in 2015 and beat the broader market performance. One ETF that tracks this sector is the Consumer Discretionary Select Sector SPDR Fund (XLY). S&P Capital IQ recommends an overweighing to the consumer discretionary sector. The firm forecasts a 3.2 percent increase in wages for 2016, which should help drive consumer spending.
Overall, the ingredients remain in place for continued gains in the stock market, including a growing economy, tepid inflation and still-low interest rates. “Companies that cater to a global consumer; e-commerce; cloud computing; anytime, anywhere connectivity; an aging population and self-directed health care tend to have attractive revenue growth profiles,” says Terry Sandven, chief equity strategist at Minneapolis-based U.S. Bank Wealth Management. “In our view, this is likely to translate into favorable performance in the new year.”
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January Barometer Offers Clues for the Year’s Stock Performance originally appeared on usnews.com
