AAII Investor Update: The January Barometer: Bullish or Inconclusive

Thursday, January 5, 2012
Charles Rotblut, CFA
AAII Journal Editor

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 48.9%, up 8.3 points
  Neutral: 34.0%, up 5.4 points
  Bearish: 17.2%, down 13.7 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »

As goes January, so goes the year, according to the Stock Trader’s Almanac. And as the first five days of month go, so go January’s full-month returns. So we should be rooting for a good start to 2012, right?

Well, the devil is always in the details.

Since 1950, the S&P 500 has started January with five-day gains 38 times. Full-year gains followed the positive starts 33 out of those 38 years (or 87% of the time). When the market started a new year with a loss for the first five days of January, full-year performance was mixed. Stocks rose 12 times and fell 11 times for an average annual gain of 0.2%.

During presidential election years, the first five days indicator has a 13-2 record. Negative starts aren’t predictive, however, with just a 50% accuracy record.

Using full-month performance for January as barometer for full-year returns confirms the mixed results. January gains are good, leading to full-year increases in the S&P 500 88% of the time. Sam Stovall at S&P Capital IQ says January declines led to negative full-year performance just 56% of the time since 1945, however. Sam also determined that presidential election years make positive January Barometer readings more accurate, but not negative barometer readings.

So root for a good a start to the year, but don’t get too flustered if the markets disappoint.

This may be particularly the case if fourth-quarter earnings season does not live up to expectations. I say this because negative earnings preannouncements from S&P 500 companies have outnumbered positive preannouncements for a ratio of 3.6. This is the highest the negative/positive ratio has been since the second quarter of 2001 according to Thomson Reuters. (The negative/positive ratio has averaged 2.3 since 1995.)

These profit warnings are one of the reasons forecasts for fourth-quarter earnings growth have fallen. Consensus earnings estimates tabulated by Thomson Reuters call for 8.3% earnings per share growth among S&P 500 companies. The current forecast is down from the 15.0% growth forecast in early October. No sector has been spared from the lowered expectations, though the materials sector has been a particular target of analysts’ cuts. Companies within this sector are projected to report an earnings decline of 8.7%; in early October, analysts were forecasting 25.6% growth.

It is possible that the downward revisions have lowered earnings estimates enough to allow the overwhelming majority of companies to top expectations when they report later this month. If companies do surprise to the upside, January may end up in the winner’s circle. If it doesn’t, keep in mind that a resolution to Europe’s sovereign debt problems and/or positive news out of Washington could help cause the January Barometer to become even less accurate following a down January.

More on AAII.com

  • January AAII Journal – The new issue features the 2011 stock screening review, the latest Model Shadow Stock Portfolio commentary from James Cloonan and a brand new series on financial statement analysis.
  • AAII Dividend Investing – We are launching a new subscription service focused on dividend investing.
  • AAII Local Chapters – Our local chapters are a great way to meet other members, and there are many interesting presentations scheduled throughout January.
  • AAII Discussion Boards – Do you pay attention to calendar indicators? Tell us.

The Week Ahead

Alcoa (AA) will “officially” start fourth-quarter earnings season when it reports on Monday afternoon. Joining AA next week will be Lennar (LEN) and Supervalu (SVU) on Wednesday, and JPMorgan Chase (JPM) on Friday.

Shifting to the economic calendar, November wholesale trade data will be published on Tuesday. Wednesday will feature the Federal Reserve’s periodic Beige Book. December retail sales and November business inventories will be published on Thursday. Friday will feature the University of Michigan’s preliminary January consumer sentiment survey, December import and export prices and November international trade data.

Several Federal Reserve officials will make public appearances next week. Atlanta Bank President Dennis Lockhart will speak on Monday and Wednesday. San Francisco Bank President John Williams and Kansas City Bank President Esther George will speak on Tuesday. Chicago Bank President Charles Evans will speak on Wednesday and Friday. Philadelphia Bank President Charles Plosser will speak on Wednesday. Richmond Bank President Jeffrey Lacker will speak on Friday.

The Treasury Department will auction $32 billion of three-year notes on Tuesday, $21 billion of 10-year bonds on Wednesday and $13 billion of 30-year bonds on Thursday.

AAII Sentiment Survey

Bullish sentiment soared to an 11-month high in the latest AAII Sentiment Survey. Bearish sentiment plunged to levels not seen since December 2010.

Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 8.3 percentage points to 48.9%. This is the highest level of optimism since February 10, 2011. It is also the third time in the past four weeks that bullish sentiment has been above its historical average of 39%.

Neutral sentiment, expectations that stock prices will remain essentially unchanged over the next six months, rose 5.4 percentage points to 34.0%. This is the second time in three weeks that neutral sentiment has been above its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, plunged 13.7 percentage points to 17.2%. This is the lowest level of pessimism since December 23, 2010. It is also more than one standard deviation below the historical average of 30%, making this an unusually low reading.

AAII members are starting the new year with optimism about the short-term direction of stock prices. Whether this positive outlook holds remains to be seen, as many individual investors are concerned about the slow pace of economic growth, Washington politics and the European sovereign debt crisis. There has been a gradual improvement in individual investors’ outlook, however, with bullish sentiment posting above-average readings during eight out of the past 13 weeks, after having stayed at below average levels for 27 out 33 weeks.

This week's special question asked AAII members whether large-cap, mid-cap, small-cap or micro-cap stocks will perform best this year. The majority of respondents said large-cap stocks, especially those that pay dividends, will deliver the best returns. Mid-cap stocks were a distant second, followed by small-cap stocks.

Here is a sampling of the responses:

  • “We’re in a negative environment where investors feel more comfortable in bigger companies with stability. Those stocks that pay dividends will be in favor.”
  • “Large-cap stocks due to their global reach and dividends; people view them as safe.”
  • “Large-cap stocks. Dividends and safety matter. Exposure to emerging markets can be attained through high-quality large-cap stocks.”
  • “Mid-cap stocks. They have better growth than small caps since they have more access to capital. Large caps still need the global economy to be more robust.”
  • “Small- and micro-cap stocks, because they are the most undervalued and usually lead the market in an economic recovery.”

» Take the sentiment survey

AAII Asset Allocation Survey

December Asset Allocation Survey results:
Stocks/Stock Funds:
    56.1%, up 3.0 points
Bonds/Bond Funds:
    21.7%, up 0.4 points
    22.2%, down 3.5 points

Asset Allocation details:
    25.6%, down 0.7 points
Stock Funds:
    30.5%, up 3.7 points
    5.7%, up 1.2 points
Bond Funds:
    16.0%. down 0.7 points

Take the survey »

Bond and bond fund allocations rose to their highest level since November 2010 according to the December AAII Asset Allocation Survey. Stock allocations also rose, but remained below their historical average.

Individual investors allocated 56.1% of their portfolio holdings to stocks and stock funds last month. This was a 3.0% increase from November. Even with the increase, December was the fifth consecutive month that equity allocations were below their historical average of 60%.

Portfolio allocations to bonds and bond funds increased to 21.7%. Though just an increase of 0.4 percentage points from November's survey, this was the largest allocation to fixed-income securities in 13 months. Last month was also the 31st consecutive month that bond and bond fund allocations were above their historical average of 15%.

Cash allocations fell 3.5 percentage points last month to 22.2%. The historical average is 25%.

AAII members maintained a historically cautious stance with their portfolios in December 2011. Ongoing stock market volatility, slow economic growth, the European sovereign debt crisis and Washington politics combined to keep equity allocations below their historical averages. At the same time, many individual investors remain frustrated with the historically low yields offered by bonds and money market accounts.

December's special question asked AAII members how they thought their portfolio allocations at the end of 2012 would differ from allocations at the end of 2011. Responses were mixed with the largest number of respondents anticipating no or very small changes. The next largest group of respondents predicted their stock and stock fund allocations would increase. A smaller group forecast an increase in their bond and bond fund allocations. Nearly equal numbers of individual investors said their cash allocations would rise and said their cash allocations would fall. Some AAII members said they were not sure if their allocations would change, with the decision resting on how the financial markets perform in 2012.

Wishing you prosperity,

Charles Rotblut, CFA
AAII Journal Editor