Sunday, February 2, 2014

Stock Market: Forget January

(Drivebycuriosity) - U.S. stocks fell 3.6% in January. So what?

Some commentators announce the loss as bad omen for the whole year: "As January goes, so goes the year"?. The pessimists refer to the fact that in 62 of the last 85 years the S&P 500 followed January's direction ( 73%) (cnbc).

There is no such thing as a predictor of the future. The high statistical correlation - 62 from 85 - is easy to explain: In the long run the stock market climbs on average around 7% annually. So in the long run most years have positive returns and most months have positive returns. Therefore most Januarys and most years are positive. Some years have severe setbacks - and the January  performance is just a part of that. 2009 showed a (partially) comeback of the stock market - and the losses from January 2009 got compensated through the end of the year.

I am still very optimistic for the year 2014. The pullback is very mild so far. U.S. stocks are just 3% below the all-time high which was reached on January 15th. And I expect that the correction will be moderate and short-lived.

I am encouraged by the current earnings season. About 79% of the S&P 500 companies that have posted earnings so far exceeded analysts’ projections (bloomberg). Profit at S&P 500 companies probably rose 8.3% in the fourth quarter of 2013 and sales increased 2.6%, analysts’ estimates compiled by Bloomberg show.

Rising company earnings (and profit margins) have been driving the rally since spring 2009. The recent earning season is backing my view that we are in a new industrial & technological revolution. As I had explained in a recent block post (driveby) technology will generate rising profits for years and thus financing a secular bull market.

It also looks like that the U.S. economy is gaining speed and that Europe is recovering. Both developments should generate additional tailwinds for the U.S. stock market.

I believe that this pullback is just another chance to invest a bit cheaper into the stock market.

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