301 North Main,
Well apparently no one told the market it was overpriced in December. With the market racing to all-time highs again, January kicked the year off with a bang. That being said I am writing the January review after our first major correction we’ve seen in 2 years. I will not spend any time discussing the pullback as I have already sent two intra-month updates discussing this. Instead I will discuss the January Effect. This is the saying that “So Goes January, So Goes the Year.” While we don’t hold our investment process to sayings like this and others (i.e. Sell in May and Go Away), these sayings do come from historical data that is interesting to study. Following the S&P 500 since 1950, there have been only TWO years (1966 and 2001) that January ended high and stocks had a large market correction for the year (a decline more than 10%). So things like momentum and sentiment can define the year based on how January goes. Even with part of our major correction this year happening in the last two days of January, the overall markets in the US have increased over 5.5% for January. For perspective’s sake, since 1971, there has only been 8 years where January has performed over 5%. In those 8 years, the average year rate of return was 28.51%. Besides one of those years (1987) the other seven increased on average 24% AFTER January. So while we don’t believe this is a sure-sign of things to come, we do find it an interesting statistic nonetheless1.
Inside the month, the cyclical sectors showed the best strength, with consumer discretionary topping the rest with a 9.3% return and technology coming in a solid second at 7.6%. Contrarily, with interest rates increasing sharply, interest rate sensitive sectors, namely utilities, performed the worst. Utilities brought in a disappointing negative 3.1% loss2.
Rising interest rates also have put continued downward pressure on the bond market. We attribute the sharp rise in rates as a “reset” of a new range without the Federal Reserve’s pocketbook participating in the auctions. The longer end of the yield curve increased with inflation expectations, however our 2nd intra-month update in February talked about why we don’t believe inflation is actually increasing at too fast a pace. Another result of the sharp increase was that the yield curve, which has been flattening and scarring certain investors, actually steepened2. This should have the effect of reducing sentiment that an inverted yield curve is on the horizon, which would signal a slowing or contracting economy. The effect of the sharp rise on bond prices was downward pressure on high-quality bonds which is mostly made up of fixed interest instruments. The more economically sensitive and less interest rate sensitive sections of the bond market fared much better, as sectors like Bank Loans produced a positive month return.
One section of the market we are evaluating heavily is the midstream MLP pipeline space. We’ve seen valuations harshly impacted by the oil crisis these last few years and have not seen a recovery with crude prices now above $60/share for an extended period of time. December and January have really been the first two months we have seen a healthiness in that sector and continue to analyze it for income and deep value opportunities.
All in all, even with the volatility seen in February we are excited about the prospects of this year. Our main focus from a macro level will be how the economy shifts and shapes up throughout the year, zeroing in on the leading economic indicators that so often help us know where we are in the cycle.
A reminder, if you have missed any of our Month-In-Reviews you can find them archived on our website at https://www.aghwealth.com/p/month-in-review.
Thank you for your trust and confidence.
LPL Financial Advisor
Vice President, AGH Wealth Management
1 All data coming from Morningstar Direct™
2 LPL Research Market Insights: January 2018
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. All indicies are unmanaged and may not be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.