January 2018 Monthly Summary

January took a page from 2017 and continued the momentum with another strong month for stocks. The Dow Jones rose 5.79% and the Nasdaq Composite gained 7.36%, making January the best stock month since March 20161. Meanwhile, interest rates were climbing, which caused the Barclays Aggregate Bond Index to begin 2018 down 1.22%. The precipitous rise in stocks was soon met with panic at the end of January that continued into the first full week of February. At the time of this writing, almost all of these January gains have been given back.

In our newsletter that we published last month, we highlighted that 2017 was an abnormal year. It was strong month after month with very little volatility. I noted that the largest drawdown was a very docile 3%. Unfortunately, 2018’s late January-early February antics have already given us a 7% drawdown with a 4% loss on February 5th alone.2 2018 will not be for the faint of heart investors.

These big swings in the market have been absent for long enough that we might have forgotten that stocks can (and often will) behave erratically. The chart [to the left] is a chart I revisit every once in a while. It shows the milestones that the Dow Jones has hit since we emerged from the Great Recession. The first thing to realize is that as we continue to follow the Dow’s climb upward, the milestones become less relevant in terms of percentage increase. The seven trading days it took for the Dow to climb 1,000 points doesn’t seem so incredible when you see that the percentage change from 25,000 to 26,000 is only 4%. As painful as it is, we shouldn’t be too panicked to see the Dow drop 1,000 points at these levels either.

Another important detail to take from the chart is that the market often moves in stages, not necessarily in a predictive pattern, but rarely in a straight line. You can see that the trek from Dow 14,000 to 18,000 took less time (98 weeks) than the 1,000 point trek from Dow 18,000 to 19,000 (100 weeks). I am not suggesting we are going to take another 100 week pause in stock growth. However, when the market has been up for 15 consecutive months, a pull back was bound to happen eventually.

Here we are today, contemplating if a new correction is upon us. Volatility surrounds us, so we resort to taking note of the fundamentals. GDP for the fourth quarter is estimated to be a healthy 2.6%.1 Corporate earnings are still reporting strong and the tax reform passed in December should help strengthen earnings going forward. Although the Fed won’t admit to “listening” to the stock market, they seem to hear what Wall Street is telling them. The market is nervous about interest rates rising too quickly and the Fed won’t want to rock an already shaky boat.

We encourage our clients to be patient and diligent with their personal stock maximums. We believe higher returns are around the bend.

 

1PMC Weekly Market Review, February 2nd, 2018

2Thomson Financial

 

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