Today, the day I’m writing this is January 29, 2018, and we have a couple of days left in the month.
I have some business travel this week so I’m writing this a little early. The data I’m presenting here is not going to be accurate as of the end of the month obviously, because as good as I think I am, I cannot predict what January 30th and 31st are going to bring.
January so far has been absolutely off the charts. January is setting up to be one of the best January months of all-time in the U.S. stock market. It is definitely the best January we have seen since 1989. And if we go back and look at some statistics, years where January is a positive month, traditionally we see the markets follow through with more growth throughout the rest of the year. About 12% on average. What we’re seeing in January could potentially bode very well for the balance of 2018.
The question becomes, “What could get in the way?”
What Could Get in the Way?
You’ll recall that last year I spent a lot of time talking to you about the rates on the 10 Year Treasury. Even at the beginning of January, I told you that I thought that the 10 Year Treasury rates would stay low. Treasury rates have leaked up here a little bit, the 10 Year Treasury began the year around 2.4%, and as of January 29, 2018, it’s at about 2.7%.
Mortgage rates have hit the highest point that they’ve been at in nearly 4 years averaging between 4.25% and 4.5%. Those higher interest rates could start to put a little bit of a damper on what is going on in the stock market. However, the reason for the higher interest rates is a very valid one.
We’re seeing good GDP, 3% quarter over quarter. Unemployment is at the lowest levels we’ve seen in quite some time. We’re seeing wage increases and some wage inflation actually start to take hold. So, the signs in the economy as a whole are very solid.
I will tell you that this week the S&P 500 just set a new record. It’s the longest stretch of time without a 5% correction. I say that because I don’t want anyone to expect that this market is going to keep going up, and up, and up without some sort of pullback. There will be a very natural correction. We do not see anything in the market that says, “Oh my gosh, full-fledged bear market.”
Many of you read our newsletter that goes out every Friday. In last week’s newsletter, we sent the article Start Preparing for the Next Bear Market Now. That doesn’t mean that we expect the next bear market to come right now. What it means is that while the markets are good, this is the time you want to step back and reassess your risk, examine your portfolio, do some analysis, and understand what that portfolio would look like in the event of another bear market. Then make adjustments as necessary.
As always, the advisors at Barber Financial Group are ready to talk to you about your personal situation as we do each and every year.
Let’s take a moment and dive into some of the statistics and some of the different sectors that are really doing well so far this year.
Let’s start with just the major indices. As you can see, the NASDAQ composite is the big winner year-to-date, and is up nearly 10%. The S&P 100 is up by 7.61%. The Dow Jones Industrial Average is once again edging out the S&P 500 at 7.49% and 7.39% respectively.
Lagging once again this year are the SmallCap and MidCap stocks. SmallCap and MidCap stocks picked up a little bit of steam toward the end of last year. I think most people would say, “Well a 4% or 5% return in a single month is pretty darn good.” But when you compare that to what the big stocks are doing and what Technology is doing, SmallCap is still lagging behind.
While we all still believe in good diversification it’s important to note that the “bigcap” names are the ones that are giving the best performance.
Let’s drill down into some specific sectors here. As we look at the sectors you can see that Health Care is our biggest winner so far this year. Health Care is up 10.72%, followed by Consumer Discretionary and Technology. Industrials are at 6.59%, but look what’s down in negative territory, Real Estate and Utilities both losing ground in the month of January. Why is that?
That is a function of rising interest rates. Utilities and Real Estate stocks are both interest rate sensitive. Also, if you take a look at preferred stocks you’re going to see a little bit of pressure there too. The reason being that as the yield on what is the safe money alternative, the 10 Year Treasury, rises it takes some of the glamour away from the higher dividend paying stocks.
So, it’s more of your growth stocks that are doing well this year. Especially in the Health Care and Technology arena.
We do expect this to be a positive year. We do not see a recession on the horizon right now. However, nobody really knows what’s going to happen. This has been a fascinating January. As I said earlier, one of the best January months in history on the stock market. I encourage everyone to come in and visit with an advisor here at Barber Financial Group to talk to us. We want to know how you’re feeling about where the markets are today.
We understand that they are overvalued, but just because markets are overvalued doesn’t necessarily mean that they come crashing down. It will require some sort of event before we see them come crashing down. We don’t know what that event is, nobody has a crystal ball, and no one can predict the future.
So, it is important that while prices are elevated, that we step back, take a look at the risk, and make sure that we’re prepared for what would be an inevitable downturn. Just like spring is going to follow winter here, every bull market is going to be followed by a bear market. It will come, we need to make sure that you’re prepared and that you understand the risk that is in your portfolio.
Until next month, I’ll look forward to seeing you in our office.
Do you have questions about preparing yourself for a potential market downturn? If so, don’t hesitate to give us a call at 913-393-1000 or schedule a complimentary consultation below.
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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.