Leading Economic Indicator

January was a great month for the stock market! The Dow Jones Industrial Average was up 2.7% and the S&P 500 Index was up 2.4%. It was the best January for the markets in 14 years.

Wow! Does that mean we’re going to have a Great Year? The “January Barometer” says so. But is this widely followed stock market indicator just another myth? The “January Barometer” works this way: If January is an “UP” month, it could mean a good year for the stock market. But if January is a “DOWN” month, well, that means that it would probably be a pretty dismal year for investors.

It would be nice if it worked, but unfortunately, the theory just does not hold up to scientific scrutiny.

So, what is the Truth? Well, economists refer to the stock market as a “leading economic indicator,” the direction of which is determined by the Wisdom of the Crowds. To put it another way, if in January, the millions of buyers and sellers out there believe that the markets and the economy will be better in, say 6 – 12 months, then stock market prices in January will rise. On the other hand, if the Wisdom of the Crowds believes that the markets will be lower in 6 – 12 months, then the stock market will drop accordingly for that month.

So clearly, in January, the masses of investors believed that things will be great – not now – but 6 -12 months from now. That’s the definition of a “leading economic indicator.” So what about February? Or March? Or the rest of the year? How will investors feel then about the prospects 6 -12 months further down the line? The answer is “Who knows?” To put it another way, the Markets are random in the short run.

Makes sense, doesn’t it? So, how should educated investors react? The answer is heavy diversification across all major asset classes, remain disciplined, avoid exuberance or pessimism, and to stay the course.


About Paul Nichols

Paul is the founder of Financial Abundance, a Registered Investor Advisory firm and EDI, an Estate Planning Firm with offices in State College and Lewisburg. He has been working with individuals, families and businesses for over twenty years, including many Fortune 500 companies. He has educated tens of thousands of people through seminars, workshops and various international speaking engagements where he shared the stage with many notable individuals such as Ronald Reagan, Robert Kiyosaki (author of Rich Dad, Poor Dad), Mike Ditka, General Schwarzkopf, and Newt Gingrich to name a few.

In 2000, after many years of traveling to consult companies and individuals, Paul decided to relocate from Colorado to State College, PA (his wife’s hometown) to develop a local advisory firm.

Paul operates under the core belief that education plus understanding leads to clarity and confidence; resulting in peace of mind. He is a proud father of three and devoted husband of 20 plus years.

Some of Paul’s accomplishments:
Regular contributor to the Centre Daily Times, via the “It’s Your Money” blog
Featured in the movie Navigating the Fog of Investing
Regular contributor to Town & Gown as the publications Investor Coach
Host of the weekly iTunes Podcast, It’s Your Money
Member of the Western PA Better Business Bureau
Member of the Centre County Chamber of Business and Industry