Opinion: Here is what to expect from stocks in 2022 after the big market gain on the first trading day of January

It bodes well that U.S. stocks rose on the first trading day of 2022, but it’s not significant.

Despite claims from some exuberant bulls, the odds of the stock market rising for the full 2022 are only marginally higher as the Dow Jones Industrial Average DJIA,
+ 0.68%
gained nearly 250 points, or 0.7%, to kick off the new year.

I came to this conclusion about this so-called “first day of January” indicator by analyzing historical data from the Dow Jones since its inception in 1896. The years when the Dow Jones was up on the first trading day of January, the stock market rose 72% of the time between that date and the end of the year. This is only slightly higher than the 65% rating that applies to all years, regardless of the performance of the shares on the first trading day in January. That seven percentage point increase in a positive year is only marginally significant at the 95% confidence level that statisticians often use to determine whether a model is authentic.

Another reason not to give too much importance to these results is that the model goes back largely to the first part of the 20e century. Since 1960, on the other hand, there has been no statistically significant correlation between market returns on the first day and its development during the rest of the year. Last year was a good example: The Dow Jones lost 1.3% on the first trading day of January 2021, then continued to gain more than 20% until December.

Another reason not to overdo the stock market performance on the first day of the calendar: the first trading days of each month seem to correlate with the direction of the market in the following 12 months; January is not particularly unique in this regard.

Moreover, correlation is not causation. The correlation that shows up in historical data is probably nothing more than the tendency of the stock market to rise more often than it falls on a given day, just as it is more likely to rise than to fall over the course of a given day. 12 month period. But that doesn’t mean one caused the other.

I also want to talk about the “first five days of January” indicator, where the market performance in the first five trading days of January predicts its trend for the year. Since the creation of the Dow Jones in 1896, this indicator has been even less statistically supported than for the indicator “First day of January”.

Could there be a way to slice and slice the data that improves either of these metrics? I did not find any. Indicators were not stronger in the second years of a presidential term, for example. They were also not worth paying attention to when the stock market was particularly strong the previous calendar year – as it was in 2021.

The essential ? While you can celebrate the stock market’s gain to start 2022, don’t get carried away. The gain tells you next to nothing about the performance of the stock market for the rest of the year.

Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected]

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