This dismal month for stocks could signal there's more trouble ahead for the market as 2022 goes on. The S & P 500 is down more than 8% for the month, which puts it on pace for the second worst January decline on record. With one more day left of trading, it could end up being the worst ever if it exceeds the 8.6% decline in 2009 in the aftermath of the financial crisis. The broad market index is also on pace for its worst monthly performance since March 2020. While they're not perfect indicators of how the rest of the year unfolds, down Januarys have typically been a harbinger of more declines for the market in the following 11 months, according to data compiled by Jeffery Hirsch, author of the "Stock Trader's Almanac." Since 1950, the S & P 500 has averaged an annual loss of 1.1% after posting a loss in January. In that time, the S & P 500 has also pulled back 13% on average from its January close to its 11-month low, according to the almanac. Hirsch also noted that "every down January since 1950 was followed by a new or continuing bear market, 10% correction, or a flat year." The S & P 500 traded Friday almost 10% below a record closing high set Jan. 3, teetering into correction territory. The fundamental reason behind this phenomenon could be that January is an important period for both institutions and regular investors, when they decide where to allocate capital for the year. And if markets are sliding in a volatile fashion as they are this year, it may scare them off from participating. The so-called January Barometer — which also has a good track record when predicting strong years for the market — has been accurate in all but 12 years since 1950, which gives it an 83% accuracy rate in that time. Exceptions include 2001 — when the Sept. 11 attacks took place, and the S & P 500 ended the year down 13% after gaining 3.5% that January. Investors may want to brace for more downside this year, especially as central banks tighten their grip on monetary polic y. The Fed signaled Wednesday that its first rate hike since 2018 could come at its next meeting in March , as the central bank tries to quell recent inflationary pressures. "It's definitely a challenging start to the year. ... It's clear that between inflation, the Fed, making sure economic growth stabilizes, that there are a lot of different crosscurrents that still need to be resolved, so it's a year of heightened volatility," said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. To be sure, this year's January decline has been so steep that market sentiment may have become overly pessimistic — thus making this actually a good time to get in for the rest of the year. Data compiled by Bespoke Investment Group showed that the number of bears in the most recent American Association of Individual Investors survey hit 52.9%, its highest level since April 2013. Such bearishness has, perhaps counterintuitively, been followed by strong returns. According to Bespoke, the S & P 500 has averaged a return of 9.19% in the six months after AAII bearish sentiment reaches 50%. The index has also been positive in those six months on 87.5% of those occasions. One year out, the S & P 500 has averaged a gain of more than 14% and has been positive 81.3% of the time. Still, historically poor Januarys have meant lower lows are ahead.
A trader works on the floor of the New York Stock Exchange.
Bryan R Smith | Reuters
This dismal month for stocks could signal there's more trouble ahead for the market as 2022 goes on.