Written by Dave Young, President and Founder of Paragon Wealth Management
It seems that the January effect where stocks usually go up in January is not as consistent as it used to be. Actually, it stopped being consistent after everyone became aware of it. The January effect appears to have moved into December.
With the S&P 500 off to its worst start since 2009 many investors are wondering what that means for the future. Obviously, no one knows for certain, but I will give you an update on what our models are telling us now.
From a positive perspective, GDP measured 3.2% in the fourth quarter which shows the economy is growing relatively well and strengthening. Consumer credit trends are the best they have been in years. Unemployment is declining. Besides stocks, bonds are a minefield and there are few conservative investment options available for investors. Those are all very positive indicators for stocks.
On the negative side, last year was very strong year and markets do not go straight up forever. This market is likely a little ahead of itself. Market sentiment continues to be very positive which makes us nervous. With this being an election year we will hear a lot from politicians telling us how bad things are which doesn’t usually help investor outlook and their desire to invest new money.
Historically, a bad January is fairly meaningless as far as projecting how the rest of the year will play out. Usually BEFORE a significant market correction (when there is no recession in sight) certain sectors and style rotations take place within the market. Also, usually there is deterioration in internal market momentum. Noticeably, we have not seen any of that type of internal market action occur up to this point.
The way that we read this is that we are in the midst of a minor correction currently. However, it is unlikely that this will evolve into a major correction. I do see a fairly strong case developing for a more significant correction (15% to 20%) occurring around three months from now.
Just like the weather, the outlook will be clearer the closer we get. And just like the weather, variables may change which will change our outlook. Based on where are models are at right now we are about 90% invested but are on high alert going forward.