January Showdown: Murphy vs. Munis

  • SumoMe

Murphy’s Law clearly states that “Whatever can go wrong, will go wrong.”

Jay’s Trading Maxim #206 clearly states: Murphy hates you.  Plan accordingly.

Another popular saying clearly states that: “All good things have got to come to an end”

Oh, and the 30+ year bull market in bond appears to be in some serious trouble.

Add it all up and what do we get?  A impending clash of opposing forces.

(See also The One Asset Class Per Month Strategy)

Murphy’s Law versus Short-Term Muni bonds during the month of January

Huh? Here is a little known fact.  For almost four decades short-term muni bonds have been a “sure thing” during the month of January.  Granted they don’t often make a whole lot of money, but still, let’s consider the long-term record.

For our test we will use Vanguard Short-Term Tax Emempt Fund (ticker VWSTX) as our proxy for short-term munis.  Figure 1 displays the total return for VWSTX during the month of January since January 1978.  Anything jump out at you?1Figure 1 – VWSTX Total Return during January (Souce: PEP database from Callan Associates); 1978-2016

For the record:

*#of times VWSTX showed a gain in January = 39

*# of times VWSTX showed a loss in January = 0

*Average gain = +0.52% (or 6.4% annualized)

As the old saying goes (well at least there should be an old saying that goes like this) “39 and 0 ain’t too shabby”.

Figure 2 displays the cumulative total return for VWSTX during the month of January since 1978.2Figure 2– VWSTX Total Cumulative Return during January (Souce: PEP database from Callan Associates); 1978-2016

But What About 2017?

Ah, there’s the rub.  So now the cat is out of the bag and the knowledge is out there that short-term munis “always” go up during January.  But when we combine this “sure thing” with the fact that “Murphy hates you” (alright, in the interest of full disclosure, it could just be me) with the fact that for the first time in decades bonds appear to be quite vulnerable, it sets up a “showdown” now in the month of 2017.

So will short-term munis chalk up #40 in a row?  Or will Murphy finally exact his revenge?

Grab some popcorn.

Jay Kaeppel

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