An indicator that points to stock losses for the year after a tough January is broken, and investors shouldn't write off 2022 just yet, LPL says

• While the S&P 500 fell by 5.3% in January, that doesn't necessarily mean stocks will drop for 2022, said LPL Financial.
• That's because the so-called January Barometer that suggests "As goes January, so goes the year," is broken.

January marked a volatile and losing start for the US stock market in 2022, but the S&P 500's monthly slump doesn't mean the broad index will end up in the red for the year, LPL Financial said Tuesday.

The S&P 500 notched an all-time high of 4,818.62 on January 4 as investors returned from the Christmas break, building on its 70 record highs in 2021 that contributed to its yearly gain of roughly 27%.

But with the Federal Reserve making its hawkish pivot on monetary policy in the face of hot inflation, investors swiftly began chopping down stock valuations, led by a nearly 10% drop in consumer discretionary shares in January. Information technology shares,meanwhile, gave up more than 7%.

The S&P 500 closed January down by 5.3%, which LPL Financial in a note Tuesday said was the worst first month of the year since 2009.

"There's an old adage on Wall Street that suggests, 'As goes January, so goes the year,' wrote Ryan Detrick, LPL's chief market strategist. The adage is widely known as the January Barometer and was first discussed in 1972 by Yale Hirsh of the Stock Trader's Almanac - "and it has an impressive track record," said Detrick.

So should investors be worried for 2022 given the rough ride in January?

Detrick said when the S&P 500 has ended positively in January, the index has been up 11.9% on average over the next 11 months and higher 86% of the time. But when January was a loser, stocks rose only 2.7% on average over the rest of the year and were higher 62% of the time.

"It isn't all bad news though as lately the January Barometer hasn't been working," he said. "In fact, 9 of the past 10 times stocks were lower in January, the final 11 months were higher, with some huge gains in there."

The most recent example was in January 2021 when the S&P 500 closed January down by 1.1% but returned 28.3% over the next 11 months. The standout year in Detrick's chart in his note was 2008 when stocks fell 6.1% in January then slumped 34.5% over the rest of the year. Investors that year were in the midst of the global financial crisis and it marked the collapse of financial services firm Lehman Brothers.

This month could turn out to be weak, too, with Detrick saying that after drops of 5% or more in January, February has been lower six of the past seven times. "Longer-term, performance over the final 11 months has been quite muted as well."

While stocks in January slumped this year, the 4.4% rally in the last two days of the month was the best end-of-month rally since November 2011, Detrick said.

"We are encouraged by the big reversal in stocks last week and we think stocks are in the process of forming a meaningful bottom," the strategist said. "But the truth is this year is going to be much more volatile than last year and investors had better buckle up their seat belts if the first month is any indication."