As goes January, so goes the year
Ahh... The New Year.
What a wonderful time to take stock of our achievements, blessings, and shortcomings!
And Letty and I take the opportunity pretty seriously.
In fact, every New Year's Eve we sit down and read over our previous year's dreams, ambitions, and goals. We reflect, learn, and dream.
It's amazing to see how we have evolved in such a short amount of time.
It's a pretty similar process to the one we use to help assess the direction of the capital markets.
The capital markets and economic activity are fluid. That fluidity allows for change... But change takes time.
Of course, I am sure we can all agree, not much changes simply because the ball drops in New York City.
Nevertheless, as we enter every new year, capital market predictions flood the seemingly endless airwaves.
And to no surprise, Wall Street is radically mixed.
In the bull camp, Fundstrat's Tom Lee sees a whopping +20% rally in the S&P 500 may come by year's end. And in the bear camp, Morgan Stanley's Mike Wilson sees a possible -20%+ decline in 2023.
Bulls believe that catalysts such as slowing wage growth and a slowdown in global inflation are the foundation behind their rally call.
Bears believe China's "re-opening" will lead to higher commodity prices and that a deeper than forecasted decline in corporate earnings may lead to some existential credit event.
I n my opinion, both numbers are wild... Yet, the underlying fundamental scenarios are all real possibilities.
However, despite the current split consensus there are some bullish divergences showing up underneath the surface.
Bullish… Outside of the US
As the debate on the direction of the US market is underway, signs of bullish divergences are starting to show internationally.
The chart above compares the Vanguard FTSE All-World ex-US ETF (VEU) and the Vanguard Total Stock Market ETF (VTI), its closest US stock counterpart to visually represent their relationship.
Broadly speaking, the chart shows all world equities (excluding the US) exhibiting relative strength versus equity markets here in the US.
And it makes sense.
The same possible US dollar peak discussed last month (read here), adding to upward pressure on gold and precious metals, may be acting as a similar driver for emerging market equities.
Couple the above with China re-opening, a strengthening supply chain, more palatable valuations, and robust dividends globally, make it a real possibility that increased investment flows to foreign companies may be on the horizon.
Conclusion
There are a ton of proverbs and adages on Wall Street. Most of them are actually rooted in some statistical significance. One of these is "as goes January, so goes the year".
It is in reference to the direction of the S&P 500 being dependent on January's performance. According to history in years when the S&P 500 had positive returns in the month of January, the average return for the year was 17.6%. The indicator has registered 10 major errors since 1950 but has an 85.7% accuracy ratio.
Regardless of what the indexes do this year, I believe 2023 to be pivotal.
It is clear that there are bullish divergences happening in the US and globally which may prove to be important. And as we continue throughout the year I will make known what I see, and invest accordingly if you are a client.
As always, I look forward to connecting with you all!
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” ― Charlie Munger
Thank you for reading,
James Anadon
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