Tom Lee: S&P 500 Up +1.8%. Why January’s Start Matters
Audio Brief
Show transcript
This episode analyzes the implications of the S&P 500 posting strong early January gains and what historical data suggests for the remainder of the year.
There are three key takeaways from Thomas Lee's latest market update. First, the positive performance in the first five trading days serves as a statistically significant bullish signal. Second, investors should anticipate a back-ended return profile rather than a linear path upward. Third, persistent strength through mid-January supports adjusting year-end targets higher.
Historically, when the S&P 500 yields positive returns in the first five sessions of the year, probabilities shift heavily toward a positive annual finish. Current data shows a one point eight percent gain year to date, reinforcing an optimistic outlook. However, the forecast warns of mid-year volatility. The projected path suggests a round trip or chopping period during the middle quarters, with the majority of substantial gains likely concentrated in a fourth-quarter rally.
This framework encourages investors to hold positions through potential mid-year stagnation to capture the expected year-end upside.
Episode Overview
- Market Status Update: Thomas J. Lee provides a mid-month check-in on the S&P 500's performance for January, noting a strong 1.8% gain year-to-date.
- The "First 5 Days" Indicator: The episode centers on the historical significance of the stock market's performance during the first five trading days of the year and what a positive start signals for the remaining 12 months.
- Trajectory Prediction: Lee outlines a "back-ended" forecast for the year, suggesting that while the year will end positively, investors should anticipate a "round-trip" or chopping period before a fourth-quarter rally.
Key Concepts
- The predictive Power of Early January: Understanding the "First 5 Days" indicator is crucial for gauging market sentiment. The concept posits that when the S&P 500 yields positive returns in the first five trading sessions of January, it statistically increases the probability of the full year ending in positive territory. This serves as an early "omen" or filter for trend strength.
- Confirmation via the "January Barometer": The analysis suggests that a strong start isn't just about the first week; sustaining that momentum through the midpoint of the month reinforces the bullish thesis. This persistent strength signals that institutional money flows are supportive of equities, providing a foundational "upside case" for the year's targets.
- The "Back-Ended" Return Profile: Investors should understand the shape of the projected returns, not just the final number. The historical composite presented suggests that even in strong years, the path isn't linear. The market may experience volatility or flat returns ("round-trip") during the middle quarters, with the majority of the substantial gains concentrated in a late-year (Q4) rally.
Quotes
- At 0:09 - "So far the S&P's up 1.8%. In my view, that's a great start for the year." - establishing the current bullish context and immediate market health.
- At 0:19 - "In the first 5 days of this year, the S&P was positive... and that’s a good omen. So I do believe there’s upside to our S&P target." - explaining the specific technical indicator that validates his optimistic year-end forecast.
- At 0:35 - "Our sort of base case is that gains possibly 'back-ended' towards year-end." - clarifying the expected timeline of returns and managing expectations regarding mid-year volatility.
Takeaways
- Monitor the First Week of January: Use the "First 5 Days" of the trading year as a primary directional filter; if positive, bias your portfolio strategy toward long exposure rather than defensive positioning.
- Prepare for Mid-Year Stagnation: Do not mistake potential mid-year chopping or "round-tripping" for a bear market; applying the "back-ended" framework helps you hold positions through volatility in anticipation of a Q4 rally.
- Adjust Targets Upward on Momentum: If the market clears both the "First 5 Days" hurdle and maintains strength through mid-January, consider that standard year-end price targets may be conservative and allow for further upside potential.
