As bad as December was for investors the positive reversal in January was just as strong and swift. The equity indices we follow in both the US and abroad posted monthly gains that most investors would be satisfied with over the course of a full year. Bond yields fell, leading to a strong 1%+ gain for the aggregate bond index. Commodities caught a bid as well. The lone loser for the month was the US dollar.
U.S. & International Stock Index Returns
|Index January 2018 Year-to-Date|
|Dow Industrials 7.17% 7.17%|
|S&P 500 7.87% 7.87%|
|S&P 400 (Midcap) 10.36% 10.36%|
|S&P 600 (Small Cap) 10.55% 10.55%|
|MSCI World 7.68% 7.68%|
|MSCI EAFE 6.47% 6.47%|
|Bloomberg Agg. Bond 1.06%|
|CRB Commodity Index 5.79%|
|US Dollar Index (0.70%)|
All data as of 01/31/2019, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Last month we described December as a disaster for equity investors as the market suffered through the worst December since 1934. That all changed almost immediately after the ball dropped in Times Square. For the month of January all the indexes we follow posted extremely strong gains. For those who believe in the January Effect – the hypothesis that how January goes, so goes the market for the year – this is great news.
The 10-year Treasury Bond was strong in January posting a gain of more than 1% as yields ended the month below 2.70%. The breakdown in yields has been a theme over the past few months. With Federal Reserve Chairman Powell indicating a more dovish tone (read: little likelihood of increased short-term rates in the immediate future) and European rates continuing to be at historic low levels, we see no reason for yields to head higher in the immediate future.
The dollar was down less than 1% in January, continuing the sideways consolidation of the past few months. We do not expect to see much change from the dollar until the trade dispute with China gets resolved, one way or the other. If an agreement is reached that brings real change to the trade relationship and increased tariffs are avoided, we would expect to see the dollar weaken. On the other hand, if the trade war gets kicked up a notch on March 1 with the threatened tariffs taking effect a strengthening of the dollar is likely.
The CRB Index came to life with the new year as it posted a positive return of 5.79% for the month. Now above its 50-day moving average, but still below a falling 200-day moving average we are less bearish on commodities but by no means bullish. Gold, on the other hand, looks like the exception as it has broken out of a cup-with-handle base and is likely to continue to head higher in the coming months. Silver’s breakout to higher levels (not illustrated) is confirming gold’s move higher.
With the December selloff came a deflation of the market PE Ratio to a reasonable 14.4x. As an investor this is a positive. While getting to this point didn’t feel good (because other than short sellers and the perma-bears nobody likes stock market losses), the selloff did wash out what felt like price inflation based off of overly enthusiastic expectations.
At the more granular level of individual stocks and sectors, the reversal in January comes as less of a surprise than if one looks simply at the market indexes. End of the year tax selling – the practice of selling off losing positions to offset capital gains taken earlier in the year – was strong this year. Compounding this was the late year selloff in commodities, adding selling pressure to the energy sector and the companies that provide service to the sector.
In our Yearly Outlook we express concern about the large number of variables that can have an effect on market direction with a call for volatility. Now that the stock market has received a bump higher, February should give us some clues at to what to expect for the first half of the year. The S&P 500 ended January at a crucial level, below key overhead resistance levels (chart #1). How the market reacts will be a tell. A strong break higher would indicate continued gains across the broad equity market.
More likely, in our opinion, is the market stalls out as big players assess the economy and markets going forward. We know that the self-imposed deadline on US-China trade negotiations is March 1. We also know that there will either be an agreement made, a breakdown in talks that leads to the implementation of higher trade tariffs by both sides, or an announcement that talks are going well and we stay status quo as negotiations continue into March. It seems inconceivable to us that, prior to a major announcement, we see a decisive move either up or down.
As a result, we enter February neutral on the stock market with a close eye on trade negotiations with China.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
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