E Santa Delivers "January Effect"

After solid gains in 2017, the U.S. indices are off to a big start in 2018. While there are lagging expectations about the longevity of stocks this year, it is generally not a wise move to fight the trend. The so called “January effect” is a seasonal increase in stock prices during the month of January.

Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens in December when investors, engaging in tax-loss harvesting to offset realized capital gains, prompt a selloff. Another possible explanation is that investors use year-end cash bonuses to purchase investments the following month. 

Some individual investors are encouraged by the record highs for the major indexes, the tax cuts and/or the Federal Reserve’s decision to continue raising interest rates at a gradual pace. Other investors are concerned about the possibility of a pullback or a more severe drop occurring. Also affecting investor sentiment are earnings growth, economic growth, valuations and the lack of volatility. Washington politics remain at the forefront of many individual investors’ minds.

Recently we wrote, "Barring any surprises, I'm hoping for new money for the new month and the New Year," said Art Cashin, director of floor operations at UBS told CNBC. He said he's also watching the first two trading days of the year, to see if they are positive. If they are and the S&P 500 is higher when taken together with the past week's performance, that would be a positive "Santa rally" period.  

The stock closed higher every day last week to confirm a Santa Claus rally. In the updated graph below, Energy stocks continue to soar on expectations of higher interest rates and rising GDP. U.S. crude hitting the highest levels in several years as a decline in U.S. production and commercial crude inventories lifted investor sentiment. Investors have a ready source of funds from selling off equities at year end.

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