The probability of an up-year for equities

The interesting phenomenon last night was when the Dow closed with a negative, while the S&P500 and the Nasdaq held up. Without economic data, it was all earnings last night.

The sales and earnings surprise has been a lacklustre and even though Verizon and Johnson & Johnson beat expectations, it was just slightly. Both stocks fall after the announcement.

This looks as though January could be the month that global equities consolidate.

The trend though is still on the upside.Taking a step back,tracking the S&P500 returns since 1950, there are six instances where the index returned 29% and above. In all these instances 1954, 1958, 1975, 1995 and 1997, the performance for the years following would be less, but still in a positive territory.

This is probably what will pan out for this year, it will end-up as an up-year but without the margin of safety on lower valuations –the upside is capped. Since 1950, there’s only been 16 times out of 63 years that the S&P500 performed negatively.

Asia was surprisingly resilient yesterday, despite the lack of news and this morning’s early trading indicated that it will brush the negative sentiment in the US aside. The upbeat global economic outlook appears to be the focus with IMF, the latest researcher to add to the upgrade of global growth.

It’s understandably a laggard, but the enthusiastic tone mirrors the leaders at Davos. Given that valuation in Asia is not as stretched compared to the US, the foreign fund flows will find its way over here in the portfolio rebalancing.

The lack of direction and conviction in the equity markets makes gold look interesting. For now it does look like gold has found its bottom late last year. There is a sense of momentum with a possible test of $1260 again if it holds at this level.

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