Should I Stay or Should I Go?

The S&P 500® Index started the year with a bang, rising 5.6% for the largest January gain in 20 years.1 An old market saying is: “So goes January, so goes the year.” In the past 50 years, there have been nine other instances of January gains greater than 5%. In eight of those years, the calendar year gains averaged 26%.2 The exception was 1987, and we all know what happened that year.

Will the January effect hold true this year? This year’s January euphoria has quickly given way to uncertainty and volatility. Inflation fears, U.S. Federal Reserve (The Fed) tightening and the threat of a trade war have cast a shadow over investor sentiment. On the other hand, U.S. tax cuts and fiscal stimulus are supporting economic growth and corporate earnings.

The bullish case

  • Markets usually peak around six months prior to a recession, and in the last 50 years have never peaked more than 12 months before a recession (although the 1987 bear market was outside of a recession).3
  • Our models and analysis place low odds on a recession before late 2019. A January 2018 peak in the S&P500 is too early under this scenario.
  • Global economic growth and corporate earnings are still robust.
  • The Fed isn’t restrictive yet. Monetary policy is becoming less accommodative, but the Fed hasn’t lifted interest rates by enough to be a brake on the economy.

The bear-market case

  • The U.S. equity market is very expensive. The CAPE Shiller price-to-earnings ratio is over 31 and higher than before the 1929 market crash.4 The market was more expensive only during the tech bubble of the late 1990s.
  • Expectations for economic growth and corporate earnings are very high. Investors are more likely to be disappointed than surprised going forward.
  • U.S. inflation is gradually picking up, which will make the Fed a bigger headwind for markets.
  • The trade war between the U.S. and China could escalate and send the global economy into a downturn.

At Russell Investments, we’re guided by our cycle, value and sentiment (CVS) investment decision-making process:

Cycle tracks the medium-term forces driving the market. We score this as modestly positive, given the strength in global earnings and relatively low near-term recession risks.

Valuation is an excellent predictor of long-term returns and a short-term indicator of risk. We believe long-term returns are likely to be modest. We score current equity valuations as high, which means the market is very sensitive to negative news, hence the rise in volatility.

Sentiment captures the short-term battle between fear and greed. Euphoria was taking hold in January and markets were very overbought. The subsequent correction has shaken confidence, but has not sent sentiment towards panic, which would be a contrarian buy signal. We score sentiment as neutral to slightly positive, given the upward momentum trend.

The January effect is more market myth than reality—there’s no fundamental reason why a strong start should drive the outcome for the year. Cycle and sentiment suggest the market can push higher, but expensive value hangs over the outlook. Be prepared for volatility, watch the cycle fundamentals, be concerned when investors turn euphoric and look to lean in when pessimism takes hold. That’s what we will be doing.

1 Source:

2 Source:

3 Source:

4 Source:

Yale Professor Robert Shiller calculates a Cyclically Adjusted P/E Ratio based on stock price divided by prior 10-year earnings. U.S. stock market is represented by an index created by Professor Shiller. The stocks included are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ. Prior to 1926 his data source was Cowles and Associates Common Stocks Index, after 1926 his source has been S&P.

Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. Average drawdown is the percentage return from period start date to the market trough within the subsequent three years.


These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

Investing involves risk and principal loss is possible.

Past performance does not guarantee future performance.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.

The S&P 500®, or the Standard & Poor’s 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

Indexes are unmanaged and cannot be invested in directly.

Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments' management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

Copyright © Russell Investments Group LLC 2018. All rights reserved.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.


© Russell Investments

Read more commentaries by Russell Investments