It’s not easy being optimistic after a year like 2011, one of violent mood swings but little overall direction. Globally, 2011 was a year marked by natural disasters, debt and deficit problems, uprisings and protests.
My expectation is that 2012 may offer more of the same, with ups and downs driven by the headlines of three major factors: Europe, China, and the U.S. economy — with much of the spotlight being on Europe.
However, the recent strength in the S&P 500 Index, an index which provides a broad snapshot of the overall U.S. equity market, this month may tell us more about the prospective performance for the rest of the year. Over the last 40 years, whenever the U.S. market has had a return above 3.75 per cent in January, the S&P 500 finished the year higher. The index finished up over four per cent in January.
There have been 13 times since 1970 when the U.S. market has been above 3.75 per cent in January, and every time the index completed the year with a substantial gain, averaging a surprising 19 per cent. This means that there is a strong probability of the index going higher in 2012.
The S&P 500 gained over four per cent in January and the probability of a good performing 2012 is building. With the U.S. index closing out the month above 1307.25, there is a strong likelihood of another 15 per cent gain by year-end based on 40 years of data.
From an investment standpoint, the odds for a promising 2012 are mounting. If the S&P 500 does perform well, as the last 13 Januaries with a 3.75 per cent or higher would suggest, then investors may wish to remain fully invested this year to take advantage of the anticipated rise.
It may be worth noting that the U.S. dollar index and bond prices normally move in the opposite direction to the S&P 500. Canadian markets typically have a high correlation to the U.S. markets and commodities are closely co-ordinated with equities, which would be a positive for our commodity-based economy in Canada. If the stock market advances this year, so should base metal, gold, silver, oil and agricultural grain prices.
We are also seeing a shift out of defensive sectors such as consumer staples, health care and utilities and a move to growth industries like technology, energy, mining, consumer discretionaries, construction and basic industry — which is usually a good sign for equity investors.
Shea Sanche is a certified financial advisor with Raymond James Ltd. in Penticton. You can contact him at shea.sanche@raymondjames.ca. This article is a general source of information and should not be considered investment advice. The views are those of the author and not necessarily those of Raymond James Ltd., a member of CIPF.