Daily Press (Sunday)

The market isn’t following the classic January script

- John Dorfman John Dorfman is chairman of Dorfman Value Investment­s LLC in Boston. His firm or its clients may own or trade stocks discussed in this column. He can be reached at jdorfman@dorfmanval­ue. com.

January so far is unfolding far differentl­y than the stock-market playbook suggests.

When people talk about the “January effect” in the stock market, they are referring to any of four separate but overlappin­g things.

The overall market tends to rise in January.

Small stocks usually beat big ones.

Last year’s disasters often come roaring back.

The month of January allegedly predicts the full year.

So far this year, the market isn’t following the classic playbook. Through Jan. 19, the market was indeed up, but barely. Stocks have gained 1.54% as measured by the most widely used gauge, the Standard & Poor’s 500

Total Return Index. The Dow Jones Industrial Average is up 0.56%.

Small stocks aren’t performing as they’re supposed to. The Russell 2000 Index of small stocks was down 4.05%, even after including dividends.

Missing rebound

What about last year’s big losers? Normally, they would rebound. For tax reasons, people often sell losers in November and December, recording losses they can use to offset gains elsewhere.

Some of these tax-loss punching bags get pushed down below their inherent value. Normally, they bounce in January.

But this year, the January rebound is missing.

As a sample of last year’s losers, I chose 10 stocks that were down 8% to 50% in 2023. They included such well-known names as Pfizer Inc. (PFE), Moderna Inc. (MRNA) and Chevron Corp. (CBX), as well as some lesser-known names.

Eight of these 10 losers were down 30% or more in 2023, and six were down 40% or more. By contrast, the S&P 500 was up more than 26% last year, including dividends.

From such severe underperfo­rmance, I expected to see a rebound, at least what Wall Street calls a “dead cat bounce.”

It hasn’t happened.

Eight of the 10 losers in my sample have kept right on falling. As a group, the 10 are dow

n 6.04% through Jan. 19, rubbing salt in the wound of last year’s losses.

What’s going on?

To understand why January is not following the normal playbook, it helps to look at the anatomy of this January’s advance. I used

Guru Focus software to run some diagnostic X-rays.

There are 35 U.S. stocks with a market value of $200 billion or more. Through Jan. 19, their median gain is 2.9%.

By contrast, if we look at a sample of mid-sized stocks, the median return so far this year is a loss of 1.45%. And if we look at small stocks, it’s a loss of 3.3%.

That shows that this year’s market advance is due entirely to the big boys. Stocks like Microsoft Corp. (MSFT, up 6%), Alphabet Inc. (GOOGL, up 4.8%) and Nvidia Corp. (NVDA, up 20.1%) have a big weight in the S&P 500, and push market indices up, even as the typical stock goes nowhere.

It’s also revealing to slice things up by market sectors. In health care, the median stock is down 1.35%. Real estate stocks are down 2.16%, even after dividends are included. In the industrial sector, the typical loss is 2.61%.

People say that this is a tech-driven market, but wait a minute. The median technology stock is down 1.85%. So it’s big tech that’s driving the bus, not all tech.

The barometer

A final bit of January lore is the notion that January predicts the full year. But data throw cold water on this idea.

I’ve studied the accuracy of the so-called January barometer over 74 years, from 1950 to the present. In the simplest form, the barometer has been correct 73% of the time.

Sound pretty good?

It’s not, because a naïve forecastin­g model, which simply declares that every year will be an up year, is correct 77% of the time.

Then too, January is part of the year it is supposed to predict. If you remove that “head start” factor and make January predict the next 11 months, the barometer works only 68% of the time.

Finally, the barometer does very poorly as a warning system. When January is down, the full year is still up in most cases. The accuracy rate for down Januaries is only 43%, or 41% is the head-start factor is removed.

There are still some days to go this month, so we’ll see whether January is an up month or a down month. Either way, don’t put too much faith in what it tells you.

Disclosure: I own Chevron, Moderna and Pfizer for one or more clients. I own Pfizer call options in a hedge fund I run.

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