Following the end a dismal January and another blowout loss by the Denver Broncos in the Super Bowl, I thought it worthwhile to look at two old market indicators and see what they may tell us about the end of the year.
1) January effect: The theory suggests that if January is positive the year is positive and if January is negative then the year is negative. This theory was correct about 80% of the time in the 20th century but has not done as well this century.
All the same, this was the first down January since 2010. Looking at the last 10 down January’s (which dates back to 1984 but 7 of the 10 are since 2000), 8 times the market was still down year to date in March, 7 still down YTD in June, and 4 still down YTD in both September and December. Based on this, a down January suggests that markets could remain vulnerable and volatile through the summer at least.
2) Super Bowl effect: This theory suggested that if a team that started in the original NFL won the super bowl the market would be up for the near and if an original AFL team won the market would usually be down. It worked pretty well up to 1997 but has broken down completely since then.
Still, the Denver Broncos have played in the Super Bowl seven times, winning two and losing five. Years Denver has played in the championship game have been quite volatile in the past and featured big summer/fall selloffs in 1987, 1990 and 1998. The two years that they won were fantastic for the stock market but three of the four years they lost the S&P only returned a gain of over 5% once, an ominous sign for this year.
Denver in the Super Bowl
Year Result Market Notes
1978 Lost 1.06%
1987 Lost 2.03% October Market Crash
1988 Lost 12.40%
1990 Lost (6.56%) Iraq invades Kuwait, recession starts
1998 Won 26.71% Summer selloff
1999 Won 19.53% Peak of bull market, technology bubble
Denver plays in Super Bowl 9.19%
Denver loses Super Bowl 2.23%
Denver wins Super Bowl 23.12%
Global stocks and currencies have been mixed to start the month. Asia Pacific markets that were open sold off in response to disappointing PMI data from China and Australia. This downward momentum has not carried through into European trading where PMI results were better, the highlight being Greece’s return to expansion territory for the first time in nearly five years.
UK PMI data fell this month and in response the FTSE
has advance while GBP has declined. This suggests the street thinks the result may take some of the pressure off the Bank of England to start raising interest rates soon.
PMI data from emerging market countries has been mixed today with Brazil, Poland and India improving, South Africa holding just under 50, China still soft and Turkey falling. This suggests that the impact of changing financial market conditions may not impact emerging markets equally and that there may be a sorting process over time.
US indices and resource dollars (CAD, AUD, NZD) have strengthened to start the week while gold, JPY and CHF are pretty much flat suggesting that although enthusiasm in stocks has faded lately, the world economy isn’t falling apart either.
This has the potential to be a very active week for markets with Bank of England meetings sandwiched between the US ADP and nonfarm payroll reports.