February 2, 2021
January was a mixed month for stocks as doubts about vaccine distribution, as well as a plethora of executive orders from newly inaugurated President Biden, caused some investors to reevaluate the valuations of their holdings. The S&P 500 Index was down just over -1% for the month and the Dow Jones Industrial average lost almost -2%. However the NASDAQ posted a gain of 1.44% and small cap stocks continued their run posting a gain in excess of 5% for the month as represented by the Russell 2000 Small Cap index. Internationally developed world stocks as represented by the MSCI EAFA Index were down just over -1% while the MSCI Emerging Market index posted a gain of 2.99%.
I am sure most of you have heard at least something about the short squeezes initiated by Reddit followers on stocks like AMC and Gamestop, so I won’t dig into that here. Most of these stocks, taken as individual retail phenomena, do not necessarily impact the broader markets. However, this is a shift in market dynamics that may likely shape how the markets as such—not to mention brokers, market makers, regulatory agencies, and other gatekeepers of efficient markets--react and behave going forward so it is worth mentioning.
With potential additional stimulus being considered on Capitol Hill, and the Federal Reserve’s extraordinarily accommodative monetary policy, there is still strong support for stocks despite the vaccine distribution hiccups and the executive orders that could impact energy prices and higher taxes. It is interesting to note that last year the Energy sector was the worst performing sector in the S&P 500 losing -37.31% in stock price valuation in 2020, but that same sector led the S&P 500 in January 2021 as investors begin to price in energy price increases.
“As January goes so goes the year” (AKA The January Barometer) is a popular refrain in the markets and is correct 70.1% of the time according to analysts at the S&P Dow Jones Indices. The S&P was down just over -1% Year-To-Date in January so that would imply a 70% chance that the index might be negative for the year, but keep in mind last January. In January 2020 the S&P 500 was down -0.16%, but finished the year up 19.2% on a total return basis. For now we will continue to follow our time tested investment processes as we wait to see how this plays out. We are cautiously optimistic, but also very aware of potential stumbling blocks.
As we entered January both our long term and shorter-term technical models were in decidedly positive territory and they remained there throughout the month. The weak price action in the final week of January resulted in some weakness in our faster moving technical indicators, but not enough to inflict negative readings. Both price and market breadth action early in February will likely influence whether or not these indicators move back to more solid readings or to actual negative signals.
Brad Thompson, CFA
Chief Investment Officer
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
The MSCI EAFE Index (Europe, Australasia, Far East) is an unmanaged free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI Emerging Markets Index consists of 23 economies including Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. The MSCI is a float-adjusted market capitalization index.
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
Year to date (YTD) refers to the period of time beginning the first day of the current calendar year or fiscal year up to the current date.
The January Barometer refers to the belief, held by some traders, that the investment performance of the S&P 500 in January can be used to predict its performance for the rest of the year.
There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical measurements are one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity.
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