After having the worst December in more than 87 years, the markets bounced back in January, gaining 7.9% in the month and the best January the market has experienced since 1987. This follows last January when the S&P 500 increased by 5.6%, which at the time was the best January the index had seen since 1997.
Historically when the market finishes January in the black, the market finishes higher for the year. Since 1928 when the market is up in January, it has finished the year higher 71% of the time. On a smaller timeframe say since 1950, when the market ends January higher, it has ended the year higher 85% of the time or 58 out of 68 times.
Now maybe your thinking to yourself that in 2018 the market was higher in January but ended the year in the red, down 6.2%. Well since 1980, we have not seen consecutive years in which the market end January higher, but finished the year in the red.
With all that historical data aside, we all know the market doesn’t follow a smooth pattern and no one has yet proven they can accurately predict the market's moves, especially based on historical data. But, if we look at what the market is facing for the remainder of 2019, I think investors should have a lot of faith in the idea that January is just the start of many good things to come.
First off, despite the political issues in Washington, and that includes both the Government Shutdown and the threat of another and the trade war currently going on with China, investors need to remember these “threats” to the economy and markets are always occurring in one form or fashion. Not a month has gone by for the past few decades that some sort of market threat wasn’t somewhat present.
At the end of the day, threats don’t matter, earnings are king and are what essentially controls whether stocks go higher or lower. And when we look at earnings, since we are in the midst of earnings season, as of the morning of January 31st, 49.7% of the S&P 500’s market capitalization had reported results for the most recent quarter. Those results have been overwhelmingly positive with 65% of companies exceeding their bottom-line estimates and earnings beating by 2.3%.
However, it should be noted that over the past three years, 70% of the S&P 500 companies have exceeded bottom-line estimates and beaten earnings by an average of 4.9%. Regardless, it is hard to argue that the figures posted for the most recent quarter are poor or that investors have something serious to worry about in 2019. It does show the economy is slowing, but that is too be expected as we haven’t had a long-term bear market in nearly a decade and the Federal Reserve has been doing everything it can over the last three years to reduce it's on balance sheet and bring interest rates back to historically normal levels.
So, what’s the point here?
The point is we are always dealing with “threats” to the markets, and by most measures, the market has been slowing for a few years now. But, despite all of that, 2018 was just the second year the market fell since 2008 and the first year since 2015. If you are someone who is thinking of “sitting” on the sidelines with the thinking that you will “wait and see” what is to come, well you may be making a mistake.
Every well-known, big-name investor will tell you that trying to ‘time’ the market is a losing game. You buy when stocks are low and sell them only when they have become overvalued. The markets fell hard in the final months of 2018, and the decline brought valuations back down to reasonable levels. Which even after adding in January’s impressive pop, the S&P 500 is still 10% off the all-time highs it set last year.
Lastly, every time in the past that the market has fallen off a cliff and the U.S. economy has ended up in a recession there have been major economic reasons causing the problems. I am not going to tell you that we don’t have one of those ‘major’ problems hiding in the dark right now, but it is safe to say that nothing major has yet started showing its head. Without that ‘major’ problem peeking around the corner, there is no reason to think the markets are going to crash and burn in 2019.
So perhaps instead of sitting 2019 out, you get partially invested in a few Exchange Traded Funds [such as the SPDR S&P 500 ETF Trust (SPY), the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), or the iShares Russell 2000 ETF (IWM)] that are less risky than single stock exposure but still offer growth if the markets continue to follow January’s lead.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
