January was the market’s best start to a New Year since 1997. The S&P 500 realized a total return (price appreciation and dividend income) of 5.2%. Had many companies not paid their traditional first-quarter dividend payments in December, the return would have been even higher.

Given this performance, should you buy stocks now?

If you believe historical correlations will continue to hold up in the future, the following data might give you an answer. Gains in January have traditionally led to full-year gains. Jeff Hirsch of the Stock Trader’s Almanac says the “January Barometer” has only had seven major errors since 1950. Using data going back to 1945, Sam Stovall, the chief equity strategist for S&P Capital IQ, calculated an average 11.2% gain for the February through December period when the S&P 500 realized a positive return in January. Stovall also determined that the correlation between January gains and February through December gains held true 84% of the time. Ned Davis Research went back further to 1928. They found 17 occurrences when the S&P 500 gained 5% or more in January. The average 11-month gain following these strong starts was 6.9%, and positive returns were realized 70.6% of the time.

There is also a valuation argument to be made. As I tweeted over the weekend, 134 S&P 500 companies are trading below their five-year average price-earnings (P/E) ratios. About the half the index’s member companies (244 to be exact) are trading below their five-year average high P/E. S&P Capital IQ sent out a report yesterday saying the S&P 500 is trading at 13.6x forecast 2013 earnings. (The firm thinks the index’s earnings will total $109.96 this year, up from a projected $103.65 for 2012.)

Not everything is rosy, however, as there are clouds in the sky to keep an eye on. The pace of economic growth is slow. Consumer confidence plunged last month, as workers saw a higher level of payroll taxes deducted from their paychecks. The automatic budget cuts known as sequestration are still looming. Europe’s economic and fiscal problems have not gone away.

In other words, the market will be up over the next 11 months, unless it’s not.

As humans, we put a lot of weight on short-term events, even though we are investing for long-term goals. Portfolio allocations are intended to be maintained for the long term. On any given month or year, stock prices could be up or they could be down. Over the long term, however, stock prices rise. This is why the question you should be asking is not whether is now a good time to invest, but rather what is the proper allocation you should have to stocks? If the answer suggests you don’t have enough allocated to stocks, then now is a good time to buy stocks. (Cash needed within the next few years should not be risked in stocks; grin and bear the low interest rates paid by money market accounts and certificates of deposits instead.)

But what if you are worried and don’t want to incur a short-term loss? I’ll share with you what I tell everyone who calls and asks whether they should get into the market. (I get asked this question frequently.) Put some money into the market now and then pick one or two dates on your calendar to invest the remainder of your money. When those dates are reached, invest the money no matter what is going on. The gradual movement into the market may be easier from an emotional standpoint, as opposed to fully investing in stocks at once, and you will still make progress toward your allocation goals.

More on AAII.com

• Should You Dollar Cost Average or Lump-Sum Invest? – Though it can be tough to jump into the market with both feet, Sam Stovall concludes you should probably do it anyway rather than dollar-cost average.
• Investing for Retirement Requires a Disciplined Approach – By setting aside your fears and maintaining an allocation to stocks before and during retirement, you can increase your odds of achieving long-term financial goals.
• How Do You Balance Your Short-Term Fears and Your Long-Term Goals? – Tell us on the AAII.com discussion boards.

The Week Ahead

Approximately 50 members of the S&P 500 will report earnings next week. Included in this group are Dow components The Coca-Cola Company (KO) and Cisco Systems (CSCO), which will report on Tuesday and Wednesday, respectively.

The week’s first economic reports of note will be January retail sales, January import and export prices, and December business inventories, all of which will be released on Wednesday. Friday will feature the February Empire State manufacturing survey, January industrial production and capacity utilization, and the University of Michigan’s preliminary February consumer confidence survey.

The Treasury Department will auction $32 billion of three-year notes on Tuesday, $24 billion of 10-year notes on Wednesday and $16 billion of 30-year notes on Thursday.

Several Federal Reserve officials are scheduled to make public appearances. Kansas City President Esther George and Philadelphia President Charles Plosser will speak on Tuesday. St. Louis Federal Reserve Bank President James Bullard will speak on Wednesday and Thursday. Cleveland President Sandra Pianalto will speak on Friday.

February stock options will expire on Friday.

AAII Sentiment Survey

Optimism dropped for the second consecutive week, though still stayed above its historical average, in the latest AAII Sentiment Survey. Pessimism, meanwhile, rose to a five-week high.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 5.3 percentage points to 42.8%. This is a five-week low. Even with the decline, bullish sentiment is above its historical average of 39% for the fifth consecutive week and the 10th out of the last 11 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, is unchanged at 27.7%. This is the 17th consecutive week and the 19th time in 21 weeks that neutral sentiment is below its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 5.3 percentage points to 29.6%. The increase puts pessimism at a five-week high. Nonetheless, bearish sentiment is below its historical average of 30.5% for the eighth time in nine weeks.

Since setting a two-year high of 52.3% two weeks ago, bullish sentiment has fallen by a cumulative 9.5 percentage points. The decline reflects both a concern that stock prices may have risen too much since last November and a reversion to the mean in the survey's results. Many AAII members are still optimistic, however, thanks to a combination of the ongoing rise in stock prices, discussions within Congress to avert sequestration, continued economic growth and better-than-forecast fourth-quarter earnings. Seasonality is also contributing to individual investors' optimistic moods.

This week’s special question asked AAII members how they viewed the current valuation of stock prices. An equal number of respondents said that stocks are either fairly valued or overvalued. Only a small group of respondents (less than 10%) think stocks are undervalued. Some members described the market as being overbought, while others thought valuations are slightly high, but not necessarily overvalued.

AAII Asset Allocation Survey

Individual investors boosted their equity allocations last month to nearly an 18-month high, according to the January AAII Asset Allocation Survey.

AAII members allocated 61.4% of their portfolios to stocks and stock funds last month, an increase of 2.8 percentage points. This is the highest equity allocations have been since July 2011. The historical average is 60%.

Fixed-income allocations declined 0.6 percentage points to 20.2%. This is a six-month low and the fourth consecutive monthly drop. Even with the decrease, fixed-income allocations remained above their historical average of 16% for the 43rd consecutive month.

Cash allocations dropped 2.2 percentage points to 18.4%. This is a four-month low. Cash allocations have been below their historical average of 24% for 14 consecutive months.

The increased allocation to stocks and stock funds is not surprising. January was a strong month for the stock market and optimism among individual investors about the short-term direction of stock prices has improved. Clarity about the tax rates, the avoidance of the fiscal cliff and continued economic growth also helped. Many of our members follow long-term allocation strategies and the modest changes in the allocation percentages reflect this.

» Take the Asset Allocation Survey