With gold around $1,200, silver above $16, and the crude oil market trading near $48, today one of the greats in the business notes that history was just made on Wall Street. He also discusses what this means for investors as well as how it will impact the rest of 2015.
January 6 (King World News) – "Don't think about what the market's going to do; you have absolutely no control over that. Think about what you're going to do if it gets there." — William Eckhardt, The New Market Wizards
History was made yesterday on Wall Street, though it wasn't exactly a festive occasion. Stocks struggled mightily from opening bell to close, dragging the S&P 500 down 1.8% in the process and marking the fourth straight day of losses for the large-cap index.
The loss itself was far from record-breaking, but the four-day losing streak is notable because it is the first one we have experienced in the last 264 trading days! That includes the entire 2014 calendar year and also just so happens to be the longest period in the last 87 years without such a skid.
Not exactly the way we wanted to begin the new year, but it isn't devastating either. In fact, since 1928, we have encountered an average of 7 four-day losing streaks per year, with 2014 being the only outlier that managed to put up a zero. It was bound to happen eventually and now it has. The action is consistent, though, with our expectation of increased volatility in the first couple months of the year coming off of the 15% rise from the October lows and is a good reminder that sometimes the markets do, in fact, go down.
So while the year is not off to the kind of start we would prefer, does this mean that we won't see the so-called January Effect in 2015? Remember, the January Effect is the seasonal tendency for the first month of the year to be strong, due in large part to the redeployment of capital freed up during tax-loss selling in December, and it is also a close cousin to the old market axiom: "As goes January, so goes the year." These two well-known patterns inevitably get a fair amount of annual coverage around this time, but recent history suggests that perhaps the trends aren't what they once were.
Going back to 2000, the S&P 500 has fallen during the month of January eight times, and we actually managed to finish the year higher five out of the last six of those instances, including in 2014. So while two trading sessions are certainly not representative of the whole month, I at least want to go ahead and allay any fears that we are doomed for the remainder of the year in case we do get some sort of early correction.
Admittedly, though, the January Effect does tend to boost small- and micro-cap stocks more so than the large caps, and this dynamic did play out yesterday with the Russell 2000 and the iShares Russell Microcap Index Fund (IWC/$76.13) continuing their recent bout of outperformance. This relationship ties into the thesis I wrote about yesterday where I recommended keeping an eye on the smaller companies in 2015. The fact that they have been outperforming on both good and bad days over the last few weeks further strengthens my belief that capital may be shifting into these higher-growth stocks as the U.S. continues to demonstrate relative economic strength compared to the rest of the world.
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