January 2016 has ended, mercifully, with the S&P 500 Index delivering a return of -5% to investors.
We can say two things about the market’s poor performance during the month of January, both of which we have said before. One, in the context of a 7-year bull market which has seen the S&P rise about 180% since its low in March of 2009, a 5% decline, though nothing to scoff at, is not a major setback. Two, this decline has zero predictive power as to the future returns in the stock market.
This raises a very natural question: does anything have any predictive power as to future returns in the stock market?
As human beings, we can’t help ourselves: we need to know – what is coming next? Is there any statistic, ratio, any piece of data with any power to point to the future? This quest for certainty will never end. Let’s look at a few ways in which market participants and scholars attempt to answer this question.