2018 is off to a good start, as during the month of January the major indices were setting records on a daily basis. Worldwide markets are off to their best start in over 30 years. A well-known market adage says that so goes January, so goes the year. And historical information going back to 1950 shows that this barometer has been wrong only nine times in those 68 years, for an 87% accuracy ratio. The catalysts for the rise have been positive corporate earnings, strong global economic growth, and tax reform.
US stocks finished January with yet another consecutive monthly gain. The Dow rose 5.8% and the S&P 500 added 5.6% – the longest monthly winning streaks for these indices in nearly 60 years. The Russell 2000 small cap index gained 2.6%, and the technology-heavy NASDAQ continued the gains from last year, gaining 7.4%.
So far this year, the best performing sectors have been Consumer Discretionary (+9.6%), Health Care (+8.1%), and Financials (+6.3%). Consumer Discretionary stocks benefit from the tax reform, as Americans find themselves with more disposable income. The worst performing sectors are Utilities (-4.2%), Real Estate (-3.9%), and Consumer Staples (+2.1%). Utilities lose value as rising interest rates add to interest expenses, hurting profitability. Analysts believe that based on relative strength, Technology, Financials, and Materials are poised for a good year. On the other hand, Consumer Staples, Telecom, and Real Estate may face some headwinds.
West Texas Intermediate crude settled at $64.50 a barrel. During the month oil prices hit a 3-year high due to strong demand, the weaker dollar, and OPEC production cuts. Higher prices motivated US shale producers to increase production, raising stockpiles. Analysts now worry that an oversupply may limit upside price potential.
During the month the yield on the 10-year rose to 2.7%, its highest level since April of 2014. The rise came after a sell-off due to a government report showing GDP expanded at a 2.6% rate in the 4th quarter. The report signaled the strength of the economy, but also raised the likelihood of more aggressive rate hikes from the Fed. Rising interest rates can negatively impact the stock market if government fixed income can offer better yields than equities. Another interest rate hike in March seems likely, when new Federal Reserve chairman Jerome Powell takes the reins.
Economic indicators showed mixed monthly results. The Chicago PMI slipped to 65.7 from 67.8 in December, showing a softening in business sentiment. However, any reading above 50 indicates improving conditions. Consumer confidence rose to 125.4 in January from 123.1 at the end of the year. Employers added 234,000 jobs this year, keeping the unemployment rate at historic lows. Both consumer spending and personal income increased .04% in December. The University of Michigan’s consumer-sentiment gauge unexpectedly fell to 94.4 from 95.5 in December. The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1% in December on a seasonally adjusted basis. Over the last 12 months, the all-items index rose 2.1 percent. On the whole, these numbers reflect a healthy economy and justify further interest rate increases.
While we are off to a good start to the year, the January barometer is not infallible. It merely indicates that if January is positive, we will end the year positive. It doesn’t predict what will occur in the next 11 months, during which we can experience significant volatility. In fact, during January the VIX index (sometimes referred to as the fear index) rose to its highest level since last August. While the index is below historic averages, its recent rise suggests volatility ahead. We believe the markets still have room to run, but investors should consider their risk tolerance when making investment decisions.