Posted January 31, 2018

New Year, Same Story

January is typically one of the stronger months of the year for the market, but few expected the parabolic move higher we saw for most of the month. After last year’s strong gains, some thought the New Year would be met with selling, as investors locked in last year’s gains and took advantage of the new tax law. That was certainly not the case, as the month saw the Dow Industrial average hit 25,000 for the first time in history, and then just a little over a week later, reach 26,000 for the first time.  There seemed to be no end to the buying until the last couple of days of the month, which saw the biggest 2 day sell off in over 18 months.  Despite the late month selling, the S&P did manage to close the month with an impressive 5.6% gain, one of the best starts to a year in history.

The New Year began right where the old year ended, with a rally to new all-time highs on both the 2nd and the 3rd and the Dow hit 25,000 for the first time on the 4th. At the end of the first week we learned a disappointing 148,000 new jobs were created in December, but in an environment where “all news is good news”, that may mean interest rates will not be going up, and the market responded with a 220 point rally to yet more new all-time highs.  The first week ended with the S&P 500 +2.6%, the best “first week” in 12 years.  During the second week of the month we started to get quarterly earnings reports and, even though most thought the reports would be strong, company after company surprised to the upside.  Multiple new all-time highs were reached during the week and the S&P 500 ended the week up another 1.6%, the best “first 2 weeks” in 15 years.  Monday of the following week the Dow hit 26,000 for the first time, just 7 business days after hitting 25,000 for the first time.  The next day the Dow jumped another 322 points and, despite the 19th government shutdown in the last 40 years, the S&P 500 ended the week with a .9% gain.  The final full week of the month saw the major indices continue their strong upward moves as corporate earnings continued to impress.  Even a report at week’s end showing 2.6% GDP growth in Q4, when many expected 3%, was greeted with a 220 point Dow rally.  The week ended with the S&P 500 up another 2.1%.  This week the market passed the longest period in history without a 5% correction.  After gaining 7.5% in the first 4 weeks of the month, it wasn’t surprising to see some profit taking during the last few days.

The strongest period of the year for stocks has traditionally been November – January, February is historically a “breather” month where there is a pause. February is the only month with an average historic return of 0%.  It is also a month that ends higher almost exactly the same number of times as it ends lower.  We expect more of that uncertain direction this year.  Economic growth is accelerating, corporate earnings are growing and, for the first time in decades, all of the world’s economies are in expansion.  Tax reform should help boost the economy and we remain optimistic.  With that said, because of the excitement about a growing, deregulated economy, stock valuations are rich.  The current price to earnings ratio is the second highest it has been, and this bull market is the second longest in history.  A 5%+ correction can come at any time, but we believe, absent some outside catalysts, dips will be a buying opportunity.  The January Barometer says if January closes higher, the final 11 months have gained, on average, another 12%.

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