10 Feb The Lato Letter: Volume 3, Issue 2.
We investors may have been a bit spoiled after an outstanding year in 2013. January greeted us with some volatility and weakness. Discussions about the fabled January Indicator began to ensue. The common perception is that the price action in January sets the tone for the remainder of the year.
Statistically, that is indeed the case when considering all years from 1901 to 2013, with up Januarys leading to a 9% return and down Januarys leading to a 1% return for the next 11 months. An excellent report from JP Morgan’s strategist Thomas Lee last week dug deeper into the numbers and the highlights are shown in the text and charts shown below.
Lee’s work shows that the January effect is muted when the market is already in a bull market as we are in early 2014. January’s price action does have an impact but historically up Januarys in bull markets have led to an average return of 17% for the balance of the year while down Januarys in bull markets have historically led to 14% returns in the next 11 months.
Lee (and I) obviously believe that we are in a bull market in 2014 and he cites one of the main factors as the continuation of the normal yield curve that has existed since the financial crisis. An inverted yield curve, when short term interest rates (less than one year) exceed long term interest rates, has historically been a classic signal leading to and during bear markets. The US Federal Reserve has begun tapering but monetary policy remains accommodating and an inverted yield curve is still not on the horizon.
Favourable monetary conditions combined with still very favourable equity valuations allow Padlock to continue to remain constructive on equity markets for the balance of the year. I believe volatility will persist as the gains of 2013 are digested in the first half of the year but I also stand by my previously written comments that 2014 will be a year of positive equity returns.
As you may recall from the last issue of The Lato Letter, I have spent the last couple of weeks travelling in southern Argentina before settling in Buenos Aires early last week. After plummeting in the late January, the Argentine peso has settled at a level of about 8 pesos per US$ while the often discussed blue dollar hovers around the 12 pesos/US$ level. Commerce continues at a somewhat slower pace but it is difficult to know if shops and restaurants in Buenos Aires are a little less busy because of the economic woes or because of the seasonal weakness of the summer holiday season.
Business owners are certainly fatigued from having to deal with very high levels of inflation and a plummeting currency and are having great difficulty in planning for the future. One business owner, a supplier to my wife’s fashion business (Yes Virginia), who does a significant amount of export business, is finding it impossible to set prices for the forward fashion seasons. Although business conditions will remain very difficult in Argentina for months if not years to come, the difficulties are far more related to domestic government policies than they are to global economic condition. Therefore, I believe it is unwarranted to suggest that Argentina’s economic woes are a reflection of global economic concerns.
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change without notice.
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