Are We Experiencing the January Effect?
January 3, 2018, 5:29 pm
It’s hard to believe that we’re three days into 2018 (I hope you had a happy New Year!). It’s nice to see the market back at work after the slow holiday trading these past few weeks.
2017 was a busy year, but I’ve loved every minute of it and I hope you did, too. Now that Wall Street has turned its attention to what will happen this year, I expect the recent upward trend from the end of 2017 to continue. Right now, the bulls maintain the upper hand, which is especially interesting since some analysts had speculated we’d see a sell-off at the beginning of the year triggered by investors selling for tax purposes that would put the bears back in control.
The broader market’s moves may get smaller and slower as interest rates rise, but the odds are also rising that we’ll see a decisive January Effect – a rally during the month of January – roil the waters one way or the other. I think we already saw a bit of that yesterday, as the three major indices – the S&P 500, Dow and NASDAQ – held firmly in the green to start the year. Remember, the bulls have corporate tax cuts and the promise of a big infrastructure bill ahead in their corner.
That’s not to say that there won’t be a little turbulence along the way, but that’s not a bad thing. The S&P hasn’t declined more than 4% since well before the election, forcing everyone in the market to chase highly-valued stocks far beyond their historical comfort zone. There’s a lot of easy money to be made on dips.
In the meantime, tax cuts accelerate what’s already healthy earnings growth and help support the high stock valuations. Corporate America achieved 9.6% growth in 2017 and is on track to deliver 11.8% richer cash flow this year. These numbers were enough to support the broader market’s move this past year. And the reality of a lighter tax regime in the mix and a rally isn’t out of the cards, which is good news for all investors.
Focusing on the very near term, people who believe in the January Effect are looking for a win this week as a hint to where Wall Street will go for the rest of the year. I think that win could be coming as I expect to see strength in the economic data due out this week – auto sales, global PMIs and the employment report – which, along with positive seasonal factors, should put traders in a buying mood for at least the first part of 2018.
2017 took Wall Street on a wild ride, and now I’m very excited for what 2018 holds. I expect it’ll be a good one, so here’s to another profitable year!