Wall Street is awash with statistics on any given day. Some are useful while others simply add to the level of noise, but on occasion we do get some hints of where the markets are going by looking at past data.
Take the month of January for example, historically it has been a good month for stocks. It is a time when new money supposedly floods into the stock market, pushing the averages up. That gets investors excited. They begin to anticipate a big up year. Some say that if the Dow Jones Industrial Average is higher after the first five days in January, then the month will be positive. Others argue that if the month finishes on an up note so will the year.
The S&P 500 Index has been up 13 of the last 20 Januarys, so statistically the odds are in our favor but not by that much. What may add weight to those probabilities is the market’s performance in 2013. The S&P 500 Index was up 30% last year (not counting dividends). Whenever that has occurred in the past (75% of the time since 1928), the next year’s January gained on average 2.4%. There have been four years since 1995 that the S&P 500 closed with over 20% gains and all four years saw average gains of 2.5%.
As for the market’s predicted performance in 2014, there is more good news ahead thanks to the gains of last year. Since 1950, there have been 17 instances when the S&P 500 was up more than 20% in a year. The same index finished positive the following year 14 times (82% probability). There have been four years since 1995 that the S&P 500 closed with over 20% gains and in all four years the average gain was 2.5%.
There is little to worry about on the domestic or on the global front right now. Washington politicians are playing nice for now. This year’s elections will short circuit any tendencies by the Tea Party to create another crisis in the first quarter. The economic numbers in the U.S., Europe and Japan are encouraging. Those are the three markets that investors should be focused on. Europe is lagging our own recovery by a year or two. Japan represents enormous upside in the years ahead and we here at home have entered a secular bull market.
So far the jury is out on January. Thursday was a down day and Friday we recouped some of those losses. I am betting that next week sees some further upside. However, somewhere out there a pullback is lurking. I expected it to happen in December but at its worst, the market was down less than 2%.
Interest rates continue to rise with the ten-year U.S. Treasury now over 3%. I believe rates are heading much higher. Part of the reason that the stock market continues to gain is that bond holders are finally getting religion. They are selling bonds and buying back into equities.
It is too hard to call the movements of the market in the short term but history seems to indicate that we should expect to see a few more days, if not weeks, of gains before this rally comes to a close. In any case, my advice remains the same for readers—stay invested.