Investment Commentary – February 2013

Market Indicators and the Outlook for 2013

Now that Super Bowl XLVIII is in the books and the S&P 500 was up 5.63% (CAD) in January, the markets are poised to advance further still and investors should rejoice. But, how many of you were even aware that the fate of the markets hinged on the outcome of the Big Game or that the market’s fortunes would be tied so inexorably to activity in January (aka “as goes January, so goes the year”)?!

The basic gist of the Super Bowl Indicator is that a victory by an NFC team or an original (pre-1970 merger) NFL team like the Browns, Colts or Steelers, indicates a bullish market for the current year. Meanwhile, an AFC victory signals a bearish drop in the market. The Super Bowl theory has been an accurate indicator 37 times out of the past 46 years. Those are pretty good odds. Suffice it to say that many believe it’s nothing more than a huge coincidence. Interestingly enough, this year’s game was a rare occurrence when the forecast for the markets would be positive regardless of the outcome since the game pitted an NFC team against an original team.

The January Barometer posits that performance of the S&P 500 that month sets the stock market’s direction for the year (as measured by the S&P 500). If January is weak, then some investors take that as a warning sign, but if the index is positive in January, then stocks will be higher by the end of the year. If an investor believes in the ability of the January Barometer to predict equity market performance, they will only invest in the market in those years when the barometer predicts the market will rise. The January Barometer has an impressive accuracy rating in excess of 70% going back to 1950, which actually improves to a perfect 100% for those years when the return in January was more than 5%! However, it is difficult to produce excess returns by using it because the improved performance by staying out of the market during bad times can be more than offset by larger losses incurred when the barometer incorrectly predicts a bull market.

There are many more, including the Hemline or Skirt Length Indicator, which suggests that the direction of the economy can be predicted based upon the average length of hems in that year’s new fashion lines. If skirts are short, markets are on the rise. Conversely, if skirts are long, markets are heading down. Some other notable indicators include the Boston Snow Indicator, Billboard Top 100 Indicator as well as the Lipstick Indicator/Lipstick Effect and there are many more.

T.E. Wealth’s Outlook for 2013

Despite the propitious prognosis suggested by both the January Barometer and Super Bowl Indicator, these relationships are likely pretty random. Regardless of their widely-touted accuracy ratings, we cannot possibly advocate making investment decisions predicated on such indicators. Nevertheless, we are quite certain that equities are attractively valued relative to bonds, especially with many key bond yields still very near their 2012 historical lows. Although bonds will likely post more modest returns, they still have a place in balanced portfolios. As it pertains to Europe, we believe the ECB can and will support markets, but long-term solvency issues remain. The recession will continue in 2013, but a return to growth is possible and European equities remain attractively priced. At T.E. Wealth, our outlook is positive, but we fully expect some bumps along the way. Markets will have to wrangle with the ongoing Debt Ceiling and Fiscal Cliff issues, along with the European Sovereign Debt Crisis, slowing corporate profit growth and weak bond returns. The markets will most likely continue to edge higher, but at a fairly modest pace as the various headwinds are tackled.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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