Another Bullish Year For Us Stocks

After an impressive return for U.S. stocks in 2017, this year has started out just as strong with the S&P 500 logging it best January in decades. In just the first month alone the index gained 5.6%. The bulls are dancing in the streets as the bears continue to hibernate for what could be another rough year. As the bull market gets ready to celebrate it’s 9th anniversary in March, the overdue correction finally hit stocks and it did so in a matter of days. After closing at a new all-time high on January 26, the S&P 500 fell by as much as 11.8% in the next two weeks. This was the first correction for the index in nearly two years and the first pullback of any significance in the same time frame. Recently the corrections have averaged 13% from top to bottom and the stock market is back to the high within three months of the low. This time around I believe the bounce back will be much quicker and investors need to be prepared.

The numbers speak for themselves when looking back on history. In the previous 15 times the index has gained at least 2% in the first five trading days of the year the S&P 500 finished the full year higher every time. What is even more astounding is that the average gain during said year is 18.6%. A move of that magnitude would send the S&P 500 to 3,170 by the end of the year. There is a good chance the index does hit that level at some point in 2018, but attempting to predict where it will end the year is just educated guessing.

If you have not yet been convinced that 2018 has history on its side, there is another interesting statistic. For the eleventh time since 1950, the Dow finished a year with a gain of at least 25%. History suggests that 2018 could be another strong one for the index of 30 large-cap stocks. Of the 10 instances the Dow closed up at least 25% for the year, the next year has been positive eight times. Even more impressive is that the average gain during that following year is 12.6% - well ahead of the average 8.5% gain for all years.

Because of my love for numbers and it is only fair to serve up some not so great numbers, here you go. The bullish tone around stocks is at a level not seen very often according to the Intelligence Sentiment Survey. The survey measures the view of investors as either bullish or bearish and 2017 was a banner year. The bulls averaged 77% over the last 12 months, the 2nd highest reading over that time frame ever and only the 10th above 70%. The overwhelming bullish tone may not be the best thing for stocks in the year ahead according to history. The market has averaged a loss of 0.2% in the year following readings above 70%.

History is meant to be broken and that is my view heading into 2018. The reason for that is based on my three main NexGen criteria – fundamentals, technicals, and intangibles. The fundamentals indicate solid underlying growth in the U.S. as well as around the globe. Earnings per share for the S&P 500 are set to increase by nearly 10% in 2017 when the final numbers are calculated. Looking ahead to 2018, we believe the earnings growth will be even more impressive as they approach 20%. For the first time since 2007, all 45 countries tracked by the Organization of Economic Cooperation and Development (OECD) are expected to show growth in 2017. This is the first time that has occurred since 2007.

The technicals are strong as evidenced by stocks of all shapes and sizes breaking out to new highs on the back of strong volume. The intangibles take into consideration everything else and with tax reform set to take effect this year and the high probability of an infrastructure bill getting passed, they are in the favor of the bulls.

The financial stocks had a solid 2017, gaining 20% based on the SPDR Financial Sector ETF (XLF). As great as the year was, it just barely enough to outpace the 19.4% return of the S&P 500. This year the financial stocks are being dealt a hand that could put them in the winner’s circle again. For starters, higher interest rates help the financials, especially the banks that loan money to their customers. As the Fed continues to increase interest rates it allows the banks to charge a higher interest rate on their loans. At the same time the amount of interest paid on the deposits on the banks will not increase incrementally. This results in a higher margin for the banks in the lending business and an immediate boost to the bottom line (profits). The tax reform plan that was passed in December is another positive catalyst for the sector that will use the new laws in their favor. The tax reform will also have a positive effect on small businesses that will rely on the financials to bankroll their growth. Then there is the consumer that will also benefit from the tax reform and with the unemployment rate low it will all end up flowing back to the financials. Finally there is the overall global economy that is strong and will add to the bullish case for all stocks and the financials in particular.

If you have not heard of bitcoin or blockchain you are either living under a rock or on the moon and even then it would be hard to fathom. The bitcoin and cryptocurrency craze was the biggest story of 2017 as average folks were overnight millionaires (at least on paper). Without getting too deep into the inner workings of blockchain, there is a reason to have it on your radar. Think of the blockchain technology as the internet in the 1980’s and bitcoin as email. Sure, email was great and we thought that was all the internet was made for. In the last few decades we have realized that there is much more to the internet than email. The blockchain is so much more than just bitcoin and the largest companies around the world are already investing billions into the technology. According to Gartner Group, the blockchain technology delivered $4 billion in business value-add or technology innovation in 2017 and the estimate is for that number to increase to $3.1 trillion by 2030. Another study by IBM showed that 80% of executives actively engaged in blockchain or are considering it to develop new businesses.

Investors have several options of how to play the biggest technology since the Internet. There are large companies that are the leaders in the technology as well as smaller names that have big upside as well as big risk. In January there were three ETFs launched in the U.S. that track the blockchain sector. Investors that have a long-term outlook could start considering building a portfolio positioned towards blockchain.

Matt McCall, founder of Penn Financial Group, an investment advisory group serving individual and institutional clients from coast to coast. Author of two best selling books, “The Next Great Bull Market” and “The Swing Trader’s Bible”. Regular guest on Fox News Channel, Fox Business Network, CNN, and GBTV with over 1000 TV segments in the last 5 years. Writing contributor for the International Business Times, The Blaze, Benzinga, and Index Universe.