Track records matter. It's true whether we're talking about business or sports. And it's definitely applicable when it comes to depending on external sources to make investing decisions.
You can easily find plenty of information online about many different market indicators. Some of them don't have track records that stand up to scrutiny. There's one market indicator, though, that has been right 94% of the time going all the way back to 1950. Here's what it says about where stocks are headed now.
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Above December low, good to go
Ryan Detrick, chief market strategist with Carson Group, recently wrote about a little-known indicator called the December low indicator. The premise of this indicator is that if the S&P 500 stays above its previous December low throughout the first quarter of a year, the index typically performs well for the year.
Detrick noted that the S&P 500 remained above its December low in the first quarter 36 times since 1950 (compared to 37 times when it fell below the December low in Q1). In 34 of those 36 cases where the S&P stayed above its December low, the index finished the year with positive gains. The average annual gain in these periods was 18.6%.
The two outliers when the December low indicator didn't accurately predict how the S&P 500 would fare for the year were 2011 and 2015. Those weren't horrible years for the index, though. In 2011, the S&P 500 finished the year down by only $0.04 -- essentially unchanged. In 2015, the S&P declined by only 0.7%.
What about those times when the S&P fell below its December low in the first quarter? The index finished the year in positive territory less than half the time (48.6%) with an average loss of 0.2%.
The good news for investors now is that the S&P 500 stayed well above its low point in December 2022 throughout the first quarter of 2023. Based on the historical pattern, it could mean that the index will deliver a positive gain this year.
Why has this indicator worked?
Stock market analyst and Forbes columnist Lucien Hooper first observed the December low indicator back in the 1970s. Hooper examined the Dow Jones Industrial Average rather than the S&P 500. However, the indicator has proven to be accurate historically for both major indexes.
There's no clear reason why the December low indicator has worked so well in the past. One potential theory hinges on the fact that December tends to be a pretty good month for the stock market. If the S&P 500 remains above the December low, it could signal that the market is in a solid uptrend.
It's important to remember that the odds are stacked in favor of a positive return for the S&P 500 regardless of how the index performs in the first quarter. Since 1950, the S&P 500 has delivered a gain 72% of the time.
Conflicting signals
While the December low indicator seems to bode well for the stock market, it's a different story with some other market and economic indicators with solid track records. For example, the M2 money supply metric declined by more than 2% last month. This indicator has accurately predicted a significant economic decline dating back to 1870.
The best strategy for investors is to have a long-term perspective. The S&P 500 has delivered positive returns 94% of the time in every 10-year period going back to when the index was first created. If you buy and hold an S&P 500 fund for 20 years, you would have made money 100% of the time. Track records matter -- and you won't find a better one than investing for the long run.
