On the heels of a banner 2017, the U.S. stock market is fresh off another historic milestone, as the Dow Jones industrial average broke the 25,000 barrier.
Now investors should consider how — and whether — they can continue riding the bull market wave.
John Anagnos, managing principal and chief investment officer of Aetolia Capital in Greenville, Delaware, says the market will continue to benefit from 2017’s momentum, with some minor changes in sector winners and losers. “If you factor in the recent corporate tax cuts and continued strength in global growth, these are terrific catalysts for stock markets to continue climbing higher.”
[See: 10 Investing Themes to Remember for 2018.]
The January effect. Historically, the beginning of the year is often viewed as a springboard for higher gains, as investors seek to cash in on the January effect. This phenomenon is a seasonal increase in stock prices during the month of January. “In December, investors are harvesting their losses, selling off stocks to offset any gains before the year’s end,” says Mike Falco, financial advisor and certified public accountant at Falco Wealth Management in Berwyn, Pennsylvania. In January, investors begin buying those stocks back when prices are low, and “this big buy-back in January drives stock prices back up.”
While January tends to be one of the better-performing months for stocks, the January effect has become more sporadic in recent years. In 2016, for example, it was relatively nonexistent as equity markets faltered over speculation around slowed growth in China. Daniel Kern, chief investment officer for TFC Financial Management in Boston, says banking on the January effect isn’t a guaranteed way to make money as “the effect has eroded, providing less in incremental returns over the past decade.”
Jeffrey Hirsch, chief market strategist at Probabilities Fund Management in San Diego, says the January barometer, invented by his father Yale Hirsch in 1972, is a more reliable indicator for anticipating investment performance. The barometer simply states that “as the Standard & Poor’s 500 index goes, so goes the year.” This, combined with market behavior during the last five days of December and the first five days of January, can be a powerful trifecta for predicting market trends the rest of the year.
The first day of trading in the new year marked new intraday and record highs for the S&P 500, and the Dow Jones industrial average hit the 25,000 barrier on Jan. 4. Now investors should be reviewing their strategy to capitalize on surging stocks.
Keep your eyes on the big picture. A standard dictate for investors who subscribe to the January effect is to buy small-cap stocks early in the year, as they tend to outperform their large-cap counterparts. With the market on such a lengthy bull run, however, investors can’t always use this premise to guide investment decisions. Instead, investors should be thinking big picture.
Valuations are high, and it’s no longer a matter of just making value plays at the start of the year, Anagnos says. “It’s difficult to find stocks that are cheap at these valuations,” and while you may find companies that offer an opening to buy at a lower price because of a recent pullback, these opportunities are becoming less common. Instead, you have to look beyond valuation and consider the growth, profit margin, cash flow and innovation potential of a company.
[See: 7 of the Best Stocks to Buy for 2018.]
If you’re trying to cash in on an uptick in the markets in January, the best way to do that is by assessing whether your investments are priced relative to where fundamentals suggest they should be, says Kei Sasaki, regional chief investment officer for Wells Fargo Private Bank in New York.
“If an investor should be so lucky to find that their U.S. stocks climbed disproportionately higher than other investments in his or her portfolio, the smart move would be to rebalance and reduce any overexposure in U.S. stocks that resulted,” he says. Ultimately, it comes down to “staying true to fundamentals and sticking to one’s strategic asset allocation.”
One thing you can’t afford to do in January is make major shifts in your portfolio without considering the long-term outlook. Metin Akyol, an economist with Zacks Investment Management in Chicago, says investors should keep in mind the overall volatility of the equity markets and the sustainability of the current bull market in particular. “The most important advice in these markets is to remain calm and avoid knee-jerk reactions and attempts to time the market,” he says. While a 10 to 20 percent correction can cause large market drops within a short time, investors often recover from those losses sooner than expected.
Rebalance strategically. January is frequently when investors rebalance, but it’s important to understand the state of the market in general and what may influence investment trends. This year, two of the most significant are tax reform and looming interest rate hikes.
Falco says the bullish influence in January could push certain sectors higher. “Energy stocks, real estate investment trusts and telecommunications stocks could prosper from the sell-off of small-cap stocks in December, attracting more buyers in 2018.” He says if you’re going to rebalance and try a new investment in January, buy at a low price. That can help cushion any future losses that may come if you’re investing long-term. And buying low in January could pay off if the stock’s price rebounds later.
Looking ahead to the coming months, Anagnos says consumer discretionary stocks could get a push from tax reform, which may put more disposable income in consumers’ hands. Corporate tax cuts may also fuel growth in the industrials and materials sectors. Interest rate hikes will benefit the financials sector, but bond investors may want to reconsider their positions. As rates rise, bond yields correspondingly drop. “Broad bond exposure is riskier, and you must look at specific areas like high yield, floating rate and emerging market bonds to capture higher yields while focusing on short to intermediate maturities.”
If you’re looking for options other than stocks, Allen Shayanfekr, CEO and founder of real estate crowdfunding platform Sharestates, says real estate is a good choice for diversification. “REITs have been a staple of every serious investor’s portfolio since the late 1960s, and because some REITs are traded similar to stocks, they can also experience a similar impact from the January effect.”
[See: 7 ETFs to Profit From Recent Tax Cuts.]
If you’re not sure whether the time is right to tweak your portfolio, consider your risk tolerance and time horizon. “A more aggressive investor might stay on this momentum swing, while a moderate or conservative long-term investor should rebalance,” Anagnos says.
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Dow 25000: How to Ride Record Market Highs originally appeared on usnews.com
