S&P 500’s gain suggests momentum for a strong 2018

One of the oldest Wall Street adages dictates: “So goes January, goes the year.” After the S&P 500’s gain of almost 6% in the first month of 2018, that should mean the rest of the year will follow suit.

Since 1950, there have been only nine major contradictions to the so-called January Barometer, according to the Stock Traders Almanac, whose founder, Yale Hirsch, devised the indicator in 1972.

To be sure, investors list several risks in the market. But many still expect the full-year 2018 to follow January, with help from earnings-boosting US corporate tax cuts and from economic data showing solid global growth trends.

“There’s still more upside potential,” said Robert Pavlik, the chief investment strategist at Slate Stone Wealth LLC in New York. He expects the S&P to rise another 7% to end 2018 at 3,040 even if there is a pullback between now and then.

“We have the revised tax situation that’s going to help,” Pavlik said. “Consumers have displayed confidence. Business spending has picked up. Manufacturing has increased, and the global economy has improved. Any pullback is only going to be temporary.”

However, after more than 15 consecutive months of total-return gains for the S&P 500, Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago, is not predicting that “stocks will continue their march higher.”

“In the face of rising rates and likely a positive hit to earnings from taxes, the markets are looking for the next thing, which may be a disappointment,” he said. “The first half of the year could be decent, the last half tougher as higher rates begin to bite and worries over the midterms begin hitting the markets.”

In the past, big outside events skewed the outcome, according to the Almanac, which cited issues such as the Vietnam war in 1966 and 1968, interest-rate increases and the September 11, 2001, terrorist attacks, as well as the anticipation of military action in Iraq in 2003.

When January was negative in both 1982 and 2009, the S&P registered fullyear gains. August 1982 saw the start of a bull market, and the current bull market began in March 2009.

The January barometer is not perfect, although it does have a pretty solid track record, LPL Financial senior market strategist Ryan Detrick wrote in a January 31 research report.

“Now where things really get interesting is when that first month is up more than 5%,” he said. “The return over the final 11 months actually gets stronger.”

In all the years when the S&P 500 rose more than 5% in January, the year’s return has never been negative, according to Detrick, though he pointed out that “they weren’t smooth rides.”

The average peak-to-trough correction was 10.7%, while the smallest intra-year pullback was 4.4%, he said.

(Reuters)