Mark Lister, 21 January 2019

Sharemarkets have started 2019 on a high, rebounding strongly from the weakness we saw in the final three months of last year. If history is anything to go by, this bodes well for the coming 12 months.

The S&P 500 index in the US posted a gain of 2.9 per cent last week, which was the fourth consecutive weekly rise. The index has surged 6.5 so far in January, putting it on track to be the best month since March 2016, and the strongest January return since 1989.

Having rallied 13.6 per cent since the Christmas Eve lows, the US market has dragged itself out of correction territory and is now just 8.9 per cent below the September record closing high, having been down almost 20 per cent at one point.

Historically, a positive return in January is a good sign for the market over the course of the year.

Since 1950, the US market has registered 50 positive years out of 69 for a hit rate of 72 per cent. If we consider years when the market has risen in January, the likelihood of a positive return over the rest of the year jumps to 88 per cent.

Before anyone gets too excited, I should point out that this “January indicator” has been a little hit-and-miss lately. During the last ten years, January and the rest of the year have moved in unison less half the time.

Last year is a good example. In January of 2018, US shares began the year with a hiss and a roar, rallying 5.6 per cent during the first month of trading.

That was the strongest start to a year since 1997, and it took the S&P 500 to 15 consecutive monthly rises (on a total return basis), equalling the record streak from 1958/59.

Despite the impressive start, US shares finished the year 6.2 per cent lower, the weakest return in a decade.

It’s been comforting to see investor sentiment turn more positive during the last few weeks, but financial markets aren’t out of the woods yet, and we probably haven’t seen the end of last year’s volatility.

It still pays to be a little cautious about some of the concerns that have emerged in recent months. This includes the path of economic growth, which has clearly slowed even if it doesn’t yet point to recessionary conditions.

US interest rates will also be in focus, with the Federal Reserve projecting another two rate hikes in 2019, at odds with financial markets that believe there will be zero.

Trade tensions are still front of mind as the temporary truce between the US and China is set to expire soon, while Brexit developments will remain in the headlines as the official leaving date looms.

Closer to home, the February reporting season will gauge the health of corporate New Zealand, while potential changes to tax policy will be of interest to investors, as well as the broader business community.

This article was also published in the NZ Herald on 21 January under the title "Strong January suggests 2019 could be a good year for stocks".