Wall Street Myths:
by Sy Harding
WALL STREET MYTHS THAT WON?T HELP
In this age of sound-bite news, fast food, and one paragraph e-mail communications, many rushed investors grab at quick maxims
and one-liners as ?analysis? on which they base investment decisions.
One such maxim widely quoted about this time every year is the statement ?As goes January so goes the year?, which claims that if
the stock market is up for the month of January the odds are very high it will be up for the year, while if the market is down for
January it will be down for the year.
I know several investors who are waiting impatiently for the market?s close on Monday so they will have ?the answer?. Not a good
idea, since the idea is one of a number of Wall Street myths, and an example of an interesting use of statistics.
Using statistics in a similar manner, I can give you an even more profitable guide because you get ?the answer? a month earlier. It
would go like this; ?In any year in which Christmas falls on December 25, the odds are very high, three to one, that the market will
be up the following year.?
Sound silly? Perhaps. But it?s no less accurate than the other. You see, over the last fifty years, and probably a lot longer (I got
bleary-eyed after looking at 50 years of data) the market was up three times as many years as it was down. So the odds for an up
market in any year are three to one anyway, regardless of what January is going to do.
The other problem with the January as a guide idea is that its findings are skewed (not statistically clean). If January is up
substantially, obviously the market already has a head start on being up for the year. It could well be down over the next 11 months
when investors would be following its 'signal', and still be up for the year (yet that would be added to its record as 'predicting' the up
year).
How about in the other direction? Does January have any extra predictive ability for down years?
I?m afraid not. Over the last fifty years, January was down 15 times. Over the following 11 months, the Dow moved higher 7 times
and lower 8 times. You might as well toss a coin.
However, you?ll hear that maxim ?As goes January so goes the year?, repeated over and over in the media this weekend. What I
really get a kick out of is the number of times TV anchors ask analysts, "But what about 'As goes January so goes the year?' Is that
telling us something?" Why keep asking, spreading the idea that it might have validity? It's easy enough to check out.
Then there?s this one, widely bandied about every four years. ?Election years have a strong tendency to be up-years for the
market.?
Well yes, that?s also true. But that can be said about any year. We already know there?s a strong tendency for any year to be up,
since the market is up three times as many years as it?s down. The real question is, are election years up more often than other
years? If so, that might be usable information.
This time we went back 100 years. There have been 25 elections since 1900. No, I can?t name the Presidents. Of those 25 election
years, the market was up 18 times, down 7 times. That?s not quite as positive a percentage as the three to one odds of any year
being up. So, we can?t put much faith in the theory that an upcoming election adds anything special to the prospects for a positive
market.
But, like the 'Goldilocks' theory of 1998, and "You have nothing to worry about as long as you take a long range view", myths take
on a life of their own, and, right or wrong, do affect investment decisions.
Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at
WWW.StreetSmartReport.com, and author of Riding the Bear - How to Prosper in the Coming Bear Market. |
