Stocks did well through most of January 2018, but by the end of the month, a correction started. “On January 30, in 2018, it was the first 1 percent decline in 112 days. That was basically the start of the fall off the cliff. In terms of percent gains, this January is similar to last but in terms of where we’ve come from, it’s very different. That was one of the calmest advances in history,” said Frank Cappelleri, executive director at Instinet.
Cappelleri said it’s important to put this year’s market move in context, when considering the January barometer. “You have one of the biggest snap backs after a very bad December, so the odds were in the market’s favor to do better than that. I think maybe you have to look where we are now. You’re up 15, 20 percent from the low depending on where you look. Are we going to go up that much more for the rest of the year?” he said.
Paulsen sees the gains continuing, after a possible pause. “I think it’s going to continue to be a fairly good year, and I think we probably go up and get close to the highs or 3,000 on the S&P, and I’m not expecting hardly anything on the economy, and earnings are going to be weak, if not flat or maybe down,” Paulsen said.
He said the slowing economy and a potential trade deal could push the dollar down and that would be a positive for stocks. At the same time, the Fed has paused and may even stop its balance sheet unwind.
Jeff Hirsch, editor-in-chief of the Stock Trader’s Almanac, said there’s another set of statistics that are in the market’s favor for a positive 2019, though they also failed last year. He said for the years when the S&P 500 was positive in the first five days of the year, plus gained during the Santa rally period, and was up for the month of January, the S&P 500 had a positive year 27 out of 30 times. It also had an average gain of 17.1 percent in those years, since 1950.
The Santa rally period is the last five days of the year, and the first two trading days of January.
“It’s definitely more encouraging after a kind of pull back in a midterm year,” said Hirsch. He said there have been cases where the market bottomed late in the year though it’s not common for December. “I think some of the legislation of tax reform, and de-regulation helped prop up the midterm year more than it normally would have.”
Some market pros are skeptical of the January barometer, but Hirsch said it makes sense because that’s when Wall Street expectations are reset for the year. That’s when big investors and pension funds put money to work for the new year, or not.
Paulsen said the barometer has been fairly accurate. “To me, there’s a little more credence to it,” he said. “A lot of money changes hands around that time, whether it’s year end bonuses or pension contributions. I do think it does sort of reflect an attitude, a sentiment that you may not get exhibited in other months of the year, and to that extent, it has some credence.”