So much anticipation for the New Year!
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
In less than 20 days we are going to have a new President and after that, expectations that many things will change.
One thing that will not change is the attitude of anticipation. In previous weekly commentary we discussed market expectations and predictions. However, one that is top of mind is January expectations. Historically, January has been a great month for stocks. However, in the last three years, it has been weak.
Does that mean that it can’t grow in January? Of course, not. Does that mean it will go down this month? We will see.
The market rally into the end of the year was a rally built upon the prospects of pro-growth policy and an administration that fosters commercial enterprise. If that proves to be forthcoming, it is likely that we will see further growth. If there are major setbacks in the form of geopolitical risk, easing of corporate expectations, disappointing corporate guidance or policies that do not reflect popular expectations, a market correction could be in the cards.
Why the markets have declined in the past few years may be due to a shift in how investors gain access to the stock markets. Prior to 2014, many investors sought and achieved their exposure primarily through mutual funds. Capital flows in January were strong. Now, since 2014, more equity exposure is found by investors using ETFs and January has had the largest outflows of equity holdings. Of course, two years is not exactly a long-term trend, but ease of transaction in ETFs does impact capital flows. Here is a chart that shows money flows by asset class.
It is remarkable how money flows have changed. It probably doesn’t tell us what will happen this month and I would be remiss if I let you believe that you should expect a decline in your holding’s value this month.
What I do believe it is telling us is that the market is extremely sensitive to macro-economic conditions and the “January effect” of years gone by is not strong enough to counter-balance those. In the last 3 years that the market began weakly (2014-2016), and markets have ended up with annual gains. Additionally, we are in a government transition year and month. That will certainly add to the uncertainty of the month’s outcome!
To summarize, it could be a bumpy ride! The Dow 20,000 watch hasn’t produced the outcome many hoped for. The market is looking at how long it may be until pro-growth policies bring results, how corporations position themselves and what changes in macro-economic sentiments might be. Interest rates are also going to be strong themes in 2017. Our recommendation for 2017 is that you make sure the investment strategies you are using are the ones you can live with because one of the biggest risks is changing strategies in moments of crisis.
So here is to a New Year, new unexpected outcomes, new highs, new new new…. Happy New Year to all!
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