TGIF – Eventful Week & Volatility Returns

You just knew this was going to be an eventful week. I’ve had it in focus on the calendar for a while. It contained the State of the Union address, Janet Yellen’s final meeting as the Fed Chair, and the biggest week of Earnings Season with Apple, Amazon and Alphabet (Google) reporting on the same day for the first time in history. The week finished up with another strong job report and the Super Bowl is on Sunday.

You’ve probably heard the adage, “as goes January, so goes the year.” It’s called the January Barometer, and it has a fairly high success rate. It suggests another good year for investors. With a 5% increase, this was the strongest January for the S&P since 1987. It’s jumped 5% to start the year 13 times now. Well, when the S&P 500 is up 5%+ in January, the full year has never been lower. It is 12 for 12. That includes 1987, which you may recall saw a massive one day selloff in October. It will no doubt be tested. February can be bumpy. This one is already.

Earnings drive stock prices. About halfway through the Earnings Season, the numbers have been really good. 75% of the companies that reported have beaten bottom-line expectations. Even more impressive is the fact that nearly 80% have exceeded expectations for revenue. Demand has picked up and companies are selling more stuff. That is a really important thing. The accelerating global economy should continue that trend.

Americans got a raise. The January job report brought the greatest wage inflation in 9 years. This has been a missing ingredient throughout this Bull Market. Consumers are spending at an increasing rate which drives the US economy. Inflationary pressures are driving interest rates and commodity prices.

Janet Yellen leaves on a high note with a strong US economy and rising interest rates. The new found inflationary pressures should continue to send rates even higher and the Fed under new Chair Jerome Powell might hike 4 times this year, something the Market had not anticipated. Higher rates sent both Bond and Stock prices lower as the Market recalibrated. The yield curve remains on the flat side, but global yields are keeping the back-end of the curve low.

After basically 14 months of going straight up, people seem to have forgotten that stock prices go down too. Volatility has returned. The S&P broke a streak this week of 99 days without even a 0.6% decline. That is the longest in well, ever. It shows how unique this one-way road has been. There has simply been no healthy back and filling and consolidation. It’s normal to correct. It’s healthy. This week was definitely a character change for the Market. It has our attention. We anticipated a mean reversion this year within an over-extended Bull Market. It just got ahead of itself and already priced in a lot of the good stuff. We expect more volatility ahead and more back and filling from the explosive rally.

Lastly, if you are a superstitious investor and care about the Super Bowl indicator, you should root for the Philadelphia Eagles over the New England Patriots. If you need a reminder on what the Super Bowl indicator is, feel free to hit the reply button and let me know.

Have a nice weekend. We will be back, dark and early on Monday.


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