Our research manager, Jason Teed, began his commentary for the All Star Investor newsletter this week as follows:
The past year was a particularly unique one as far as domestic equity markets go. The S&P 500 experienced record-breaking low volatility, as well as consistent moves upward. The Index was up every single month for the year, the first time that has ever happened in its history.
After a strong 2016, equity markets experienced an even stronger 2017: The S&P 500 was up more than 20%, and emerging markets were up more than 35% for the year. International developed countries also fared well, rising about 25% for the year. This risk-on attitude left bonds somewhat unappealing, with the Barclays Aggregate Index up only 3.5%.
Despite a very active news year that included political turmoil, threat of nuclear attacks, and some of the worst natural disasters in U.S. history, the domestic equity market largely moved upward, ignoring all of these events. This goes to show that the current bull market is fundamentally a strong one
Contrary to most of last year, as well as the usual year-end seasonal tendencies, stocks were down last week. The tech-heavy NASDAQ declined more than the S&P 500. However, at the time of this writing (January 2), all of the indexes are up and exceeding their levels a week ago.
The last high on the S&P 500 was last year on December 18. While the usually bullish last two weeks of the year did not deliver another, the Index is currently topping the heights hit on the 18th and flirting with its first new all-time high now that we are in a new year.
This year-end decline was much like other setbacks of 2017. It was very shallow, only totaling a fraction of 1% on the S&P 500 and just short of 1.5% on the NASDAQ Composite.
Bonds gained a bit last week. And as the U.S. dollar declined, gold staged a strong rally.
Looking ahead, it’s a big week for economic indicators. There will be 14 different economic statistics reported this week, finishing with the much-anticipated employment report on Friday (January 5). So some volatility remains possible.
At the same time, the Citi Economic Surprise Index, which charts the number and direction of economic report surprises, has totaled its highest level of positive surprises since 2010. (A surprise is a statistic that is reported higher, a positive surprise, or lower, a negative surprise, than the consensus of economists predict.) As the chart reveals, the surprise index has been on a strong uptrend since the middle of 2017.
Most investment gurus, the banks, and brokerage firms are calling for gains this year of 7% to 10%. This seems reasonable to many. However, note that in the 117 years of the S&P 500, stocks have only registered annual gains in this range eight times. Yet that range is about the average gain for the 117 years of the Index. As usual, we find that averages don’t mean much. The S&P annual return usually falls woefully short of that range or considerably above it.
Despite the fact that last week I suggested that the returns would top that range, I still expect that a correction greater than the year-end minor stumble will occur before we move on to new projected year-end heights.
Stocks continue to be overbought, although less so than two weeks ago. Also, seasonality, after this week, is not supportive.
It used to be that January was considered a positive month. And if one looks at the 50- and 100-year averages that would appear to still be the case. In both lookbacks, the S&P 500 Index averaged 60% or better positive Januarys with the average gain over half of 1%.
Nineteen years ago that changed. Now the 20-year averages for Januarys are very weak. The month has been down during that period 55% of the time! The average loss has been 1.25%.
When Bespoke Investment Group breaks down the average January results since 1984 based on how the previous year has performed (down, up less than 15%, or up 15% or more), we can observe that the market has averaged a top around the eighth of the month.
While this suggests that we have an increased chance of a correction this month, I noticed another tendency on our seasonality charts that make me more optimistic. For the last 10 years, the market has been very strong, both long term and short term, during the months of February, March, and April. So even if we see a dip in January, it is probably a dip that should be bought!
Disclosure: No communication by Dynamic Performance Publishing or our employees to you should be deemed as personalized investment advice. Any investment recommended in this newsletter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Dynamic Performance Publishing, its affiliates, and clients may hold positions in the recommended securities. Results are not indicative of holdings for clients of Flexible Plan Investments. Forwarding, copying, or otherwise duplicating this information for the use by anyone other than the intended recipient is expressly forbidden. These results are not representative of those achieved by clients of Flexible Plan Investments, Ltd. (FPI) due to differences in security selection, timing of trades, transaction fees, and FPI’s management fees.