The market is off to a great start in 2012 but it may be tough for stocks to keep climbing.
NEW YORK (CNNMoney) -- The Nasdaq shot up 8% in January. 8% in one month! Unless you are extremely greedy, that would be a good year.
The Dow and S&P 500 also surged in January, rising 3.4% and 4.4% respectively. That's the best beginning to a year for those blue chip indexes since 1997. Stocks continued to sizzle on the first day of February.
But should investors be prepared for the markets to cool off after such a scintillating start? Or will the so-called January barometer, the notion that whenever the market rises in January it should finish the year higher, work its magic again?
Usually, a hot January does lead to a great year for stocks. In 1997, for example, the S&P 500 wound up gaining an astonishing 31%. However, this is not an ironclad rule.
That 8% jump in the Nasdaq I mentioned? That was the best performance for the Nasdaq since 2001 ... and 2001 wound up being a terrible year for the markets. The S&P 500 fell 13% and the Nasdaq lost more than 20%.
Of course, 2001 was an unusual year because of the 9/11 attacks. It was also a year when the economy was in recession. There is a good case to be made that stocks should do well this year since the economy is slowly but surely recovering.
"The fundamentals are more encouraging. So I could easily see a low double-digit return for stocks by the end of the year," said Jack Ablin, chief investment officer with BMO Harris Private Bank in Chicago. "But there are still broader challenges for the markets."
So it's probably a stretch to expect another year like 1997. Sure, the eventual Facebook IPO could usher in another boom year for tech stocks. However, there are many factors that could cause stocks to flat-line or even quickly pull back following January's jump.
Europe is still not out of the woods. The news keeps getting better. But until there is certainty that Greece will not default and that larger nations like Spain and Italy can get their fiscal problems under control, investors will remain nervous about the health of the big banks. That's bad for the broader market.
Beyond the financials, beaten down momentum stocks like Netflix () and First Solar ( ) are surging too. Those two stocks are heavy targets of short sellers. The big move up in last year's losers reeks of speculation.
Trading volume continues to be so light that it makes me think that "It's Oh So Quiet, the 50s tune popularized by Bjork's cover version, should be the market's theme song. Shh! Shh!
And here's an interesting twist about the market. Even though stocks are surging, it's clear that investors aren't completely willing to throw in the towel on so-called safe haven assets.
Gold has shot up again. Treasury bond yields are heading back toward record lows as well. Investors have been scooping up 10-Years since the Fed announced it was likely to leave interest rates near zero until the end of 2014.
It's pretty rare for bonds and stocks to both enjoy solid gains for a full year. Something has to give.
The other big wild card for 2012 is that this is a presidential election year. And it is one that is expected to be highly contentious.
Many investors were rightfully worried last year about the buffoonery in Washington. Politics as usual on steroids led to the United States getting stripped of its AAA credit rating last summer.
With lawmakers likely to spend most of their efforts this year on re-election as opposed to actually doing what's best for the country, the dreaded "political uncertainty" that led to a lot of market volatility in 2011 could be even more prevalent as the year drags on.
So when all is said and done, I think the only thing investors can safely bet on is more volatility. We may have more months like January before the year is over. But we could also have several months where stocks fall more than 4% sprinkled in as well.
"Nobody is hoping for a repeat of 2011. That was a frustrating year to manage money. However, the economic data is just okay. I don't see how profits can surge enough to keep the January rally going," said John Norris, managing director with Oakworth Capital Bank in Birmingham, Ala.
"If we can end this year up 8%, you should consider yourself happy. These are more volatile markets," Norris added.
Best of StockTwits: If you swim in the Amazon, you may get bitten by piranhas. The online retailer's sales missed targets and investors are worried about rising expenses eating into profits. Kudos to firstadopter for being skeptical Tuesday. He's got more to say.
Definitely. I still think Amazon (Fortune 500) is an amazing growth story. But it doesn't deserve a triple-digit P/E ratio.,
Amazon did fall as low as $172 this morning before bouncing back to about $176. So there may be several investors looking to buy when it's under $175.
That bugs me too. Apple (Fortune 500) does a great job of releasing sales for iPhones, iPads, Macs, etc. Amazon should be more transparent about Kindle sales. It's nice that sales "nearly tripled" during the holidays. But from what to what?,
Not sure about that. Amazon may be able to absorb the losses on the Kindle as long as it sells a lot of digital content. Speaking of that ...
That's a great point. As I said in today's Buzz video, Amazon is still essentially nothing more than a low-margin retailer. Amazon's cloud business holds great promise, and services revenue did surge nearly 75% in the fourth quarter. But services still only accounted for 12% of total sales in the fourth quarter.
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
|What we want Apple to unveil at WWDC|
|Millennials squeezed out of buying a home|
|7 traits the rich have in common|
|Big Data knows you're sick, tired and depressed|
|Your car is a giant computer - and it can be hacked|
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||4.23%||4.19%|
|15 yr fixed||3.26%||3.27%|
|30 yr refi||4.22%||4.18%|
|15 yr refi||3.26%||3.26%|
Today's featured rates: