Can markets sustain first day's gains?

NEW YORK -- Stocks surged 1.6% on the first trading day of 2012. While one day does not make a trend, history suggests the good start could bode well for the full year if the gains persist and stocks finish up in January.

There is an old saying on Wall Street, "As January goes, so goes the year." Stock market performance for the full year has moved in the same direction as January more than 70% of the time since 1929, says Standard & Poor's. Individual stocks have finished higher nearly 80% of the time after gains in January.

The ability of the S&P 500 stock index to build on its 11.2% gain in last year's fourth quarter is being tentatively viewed by investors as a positive.

"I don't put a lot of faith in just today; it has to be a full month of positive performance," says Andrew Fitzpatrick, director of investments at Hinsdale Associates. "January is predictive. If the year gets off to a strong start, positive momentum builds."

The first day of the year's performance moves in the same direction as the rest of the year only 50% of the time.

There are many theories on why the first month of the year sets the tone. January marks a clean slate for investors. How they position their portfolios for the year ahead signals whether they're optimistic or pessimistic, says Jim Paulsen, chief investment strategist at Wells Capital Management. "January is the month when people lay down their bets," he says. If investors' bullish bets are correct, it often creates a positive feedback loop that boosts confidence and stock prices.

January performance also carries over from the mood of the market at the end of the year. "If economic data is strong heading into the year, there is a good likelihood it will continue," Fitzpatrick says.

Tuesday's gains are likely a carry-over from market ebullience at the end of the year. Gains in late 2011 were driven by improving economic news at home, strong profitability of U.S. companies and a growing belief that European leaders will do what it takes to avoid a repeat of the 2008-09 financial crisis. That upbeat trend continued Tuesday, with fresh data on U.S. manufacturing and construction topping expectations.

Andrew Busch, investment strategist at BMO Capital Markets, warns that it is "difficult to extrapolate beyond the first week, let alone the rest of the year," based on January's market moves. He cites high levels of uncertainty about Europe's debt crisis, China's economic slowdown and political unknowns in the U.S. as possible market headwinds.