U.S. stocks enjoyed one of the best Januarys in decades with the S&P 500 Index up 8.0%, Dow Jones Industrial Average up 7.3%, and the Nasdaq 100 gaining 9.0%. The small-cap Russell 2000 surged 11.3%.
Foreign stocks also gained, with developed markets, as measured by the MSCI EAFE Index (EFA), up 6.6% and emerging markets (EEM) up a solid 10.3%.
After a dismal fourth quarter, the strong surge was unexpected and most welcome. Some investors may be frustrated if they lightened up in the decline and therefore didn't fully participate in the recovery, but as long as you didn't panic and liquidate, you are almost certainly feeling relief.
What changed?
Perhaps the best explanation for the rally is that the selling was so extreme and indiscriminate that markets were due for a bounce. As stocks gained, confidence returned, and some investors who had panicked out started to buy back in. The Fed signaled a sensitivity to tightening financial conditions and implied that they would pause further rate increases. Government employees returned to work after the longest shutdown in history, and trade talks with China resumed without an escalation in tariffs.
What hasn't changed?
The yield curve, which can be a sign of economic health, is still relatively flat with the two-year U.S. Treasury yield at 2.5% versus a 10-year U.S. Treasury yield under 2.7%. U.S. budget issues remain unresolved, and there’s a potential for another shutdown. While ongoing negotiations appear encouraging, a China trade deal remains elusive. Growth has slowed, especially globally (Italy dipped into recession), and there is still the potential for a no-deal Brexit. Even though market indexes posted solid gains, they remain well below their 2018 highs.
What should you do at this point?
The rally gives you the chance to review your portfolio and make sure you’re on track to reach your goals. At least once a year, you should take a big picture look at your investments: review your goals, your plan to reach your goals, your risk needs, and your overall allocation to stocks and bonds.
Then take a closer look at your portfolio and see if there are any trades you forgot to make or if there’s any additional cash that needs to be invested. If you find that there are some changes to be made, schedule out when and how you plan to make these adjustments, and write it down so you can refer back to it later.