Why January Could Bring Big Gains for Stocks

Summary

Podcast Summary

Podcast: WSJ Your Money Briefing
Episode: Why January Could Bring Big Gains for Stocks
Date: January 8, 2019
Host: J.R. Whalen (The Wall Street Journal)
Guest: Jessica Mention (WSJ Markets Reporter)

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Episode Overview

This episode explores why January 2019 might see a strong start for the stock market after a tumultuous December. Host J.R. Whalen and WSJ reporter Jessica Mention discuss the market volatility of late 2018, factors supporting optimism for January, historical precedents, and strategies for investors in the current economic cycle.

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Key Discussion Points & Insights

1. December Roller Coaster & the January Rebound

• Stock Market Volatility:
  December 2018 brought extreme swings, with the Dow moving by nearly 1,000 points on some days.

• January Optimism:
  January is usually a strong month for stocks. Early signs (e.g., a major rally on January 4) point to possible gains.

  “On January 4, we saw quite a big move in the market. The Dow ended the day up more than 800 points. And that was really driven by a very robust jobs report. And... the Fed would be more flexible with its policy.”
  — Jessica Mention [03:10]

2. Macro Factors Supporting Markets in January

• Strong Jobs Report:
  A positive jobs report helped fuel the early January rally.

• Fed Policy Shift:
  Fed Chairman Jerome Powell signaled a more flexible, dovish approach, reassuring worried investors.

  "...the Federal Reserve chairman, came out and said the Fed would be more flexible with its policy. And I think those were comments the market was really looking for."
  — Jessica Mention [03:10]

3. The Presidential Cycle Effect

• Pre-Election Years Tend to be Strong:
  Historically, the third year of a presidential cycle sees policy moves to bolster the economy, which often supports markets.

  “We are in what traders and analysts call the pre-election year, the year before the election. Typically the market does perform well, and that's usually because incumbents will implement new policies or put forth lower taxes ahead of the election in an effort to boost the economy.”
  — Jessica Mention [03:46]

• Caveat:
  Major policy moves (e.g., the 2017 corporate tax rate cuts) may already be priced into markets, raising questions about future outperformance.

4. Risks: Trade Tensions & Global Growth Concerns

• US-China Trade Negotiations:
  Persistent trade friction remains a risk, potentially inhibiting further market gains.

  “There's been so many different narratives... one of which is the ongoing trade tensions as well as the concerns of slowing global growth and sort of the Federal Reserve and the uncertainty that there was about whether or not they would be flexible."
  — Jessica Mention [04:51]

• Upcoming Negotiations:
  Trade talks between US and Chinese officials could add either clarity or uncertainty.

  “Officials are meeting this week to discuss trade negotiations with officials in China... up until the beginning of March.”
  — Wall Street Journal Reporter [05:19]

• Effect of Uncertainty:
  The market dislikes uncertainty and reacts strongly to both positive and negative news in this area.

  “Good news or bad news, the market does not like uncertainty. They just want to know. Give it to me straight.”
  — J.R. Whalen [05:46]

5. Where Investors Are Positioning

• Sectors Hit by 2018 Volatility:
  Industrials and energy stocks, hurt by trade and falling oil prices, may be poised for a rebound.

• Small Cap Focus:
  Small cap stocks (e.g., Russell 2000 constituents) could benefit more in late-stage bull markets due to their domestic focus.

  “If you're looking at say some of the most held back stocks, especially in the last quarter... it's industrial stocks... Industrials along with energy, which have clearly been beaten up the last few years... But they do typically perform well in the latter stages as well as if you're looking at small cap stocks.”
  — Jessica Mention [06:01]

6. The Importance of January’s Performance

• The “January Effect”:
  January’s return sets the tone—when stocks rise in January, the remainder of the year is often strong.

  “When the market was up in January... the market was higher 83% of the remaining 11 months... just those pre-election third years, the market was up 81% of the time.”
  — Jessica Mention [07:24]

• Indicator for the Year:
  Declines in January often presage poor full-year performance, particularly for the S&P 500.

  “Since 1950, anytime the S&P has finished lower in January, it's either gone before preceding a bear market, during a bear market, or the market ended up flat or in some sort of correction.”
  — Jessica Mention [07:47]

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Notable Quotes & Memorable Moments

• On the size of the January 4 rally:

  “The Dow ended the day up more than 800 points. And that was really driven to the fact that we got a very robust jobs report.”
  — Jessica Mention [03:10]

• On the market’s desire for clarity:

  “Good news or bad news, the market does not like uncertainty. They just want to know. Give it to me straight.”
  — J.R. Whalen [05:46]

• On interpreting January’s market signals:

  “If we see a lot of pros go in and start buying [in January], it could be an indication of maybe how the year will play out.”
  — Jessica Mention [08:20]

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Important Timestamps

• December market recap & January outlook: [00:36]–[03:07]
• January 4 market rally and drivers: [03:07]–[03:39]
• Presidential cycle discussions & tax cuts: [03:39]–[04:39]
• Risks: US-China trade and market uncertainty: [04:39]–[05:52]
• Investment positioning: Industrials, energy, small caps: [06:01]–[07:12]
• The "January Effect" and annual forecasts: [07:12]–[08:36]

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Summary Takeaways

• Despite a rocky December, January 2019 holds promise for stock returns, thanks to supportive macro factors and historical trends.
• The third year of the presidential cycle tends to bring market-friendly policy moves.
• Watch for developments in US-China trade negotiations, as outcomes here could introduce more volatility or provide clarity.
• Sectors such as industrials, energy, and small caps may be attractive for investors late in the economic expansion.
• January’s market performance is a key signal for the rest of the year—positive returns often foreshadow strong annual results.

For continued updates and analysis, keep an eye on the WSJ Markets Team.

Transcript

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Spokesperson]

Tell Congress stop the Durbin Marshall money grab for corporate megastores Paid for by the Electronic Payments Coalition.

[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Investors who followed the stock market in December felt they were on a roller coaster. Well, now, come January, there's good reason to believe it could be much more smooth sailing on Wall Street. That's coming up first. These money and market stories you should know The IRS says it will pay tax refunds during the government shutdown. The decision allows hundreds of billions of dollars to flow more once tax filing opens later this month. Until Monday, the Trump administration and its predecessors had said that refunds couldn't be paid while the IRS was shut. That's because it wasn't necessary to protect life or government property. Mortgage rates have fallen to around their lowest level in eight months. That's offering a potential boost to the unstable housing market. The average rate for a 30 year fixed mortgage is down to about 4.51%, matching the lowest level since last spring. That rate is still higher than its level of 3.95% from a year ago, but it's fallen from a more than seven year high of nearly 5% in October. As rates have steadily fallen, some real estate agents said they're seeing buyers start to creep back into the market. Sales of existing homes rose 1.9% in November from a year earlier to a seasonally adjusted annual rate of 5.32 million, though that figure is down sharply from a year earlier. It's been a happy new year so far at the gas pump, but the price to fill up could be on the rise soon. Saudi Arabia plans to cut the amount of of oil it exports to 7.1 million barrels a day by the end of the month. In an effort to boost prices, Saudi Arabia exported about 7.3 million barrels a day of crude last month. That was already down from about 7.9 million barrels a day back in November and 7.7 million barrels a day in October. The country is trying to fund ambitious plans to diversify its economy beyond petroleum products. December's stock market moves were not for the faint of heart with the Dow Jones Industrial Average moving up or down nearly 1,000 points on some days. But there could be some good news coming for investors as we start the new year. And Wall Street Journal markets reporter Jessica Mention is here to explain. So, Jessica, in the fourth quarter, the markets really didn't fall in line with respect to history. Case in point, there was no Santa Claus rally. But typically January is a strong month for stocks and things seem to be lining up for that to ring true this year.

[Wall Street Journal Reporter]

So on January 4, we saw quite

[Jessica Mention]

a big move in the market. The Dow ended the day up more than 800 points. And that was really driven to the fact that we got a very robust jobs report. And at the same token, Jerome Powell, the Federal Reserve chairman, came out and said the Fed would be more flexible with its policy. And I think those were comments the market was really looking for. And it was a huge bounce back after the market had over the course of the first two trading days was really the market's worst start to a year since 2000.

[J.R. Whalen]

Also, this being the third year of the presidential election cycle has a lot to do with this potentially being an up year as well.

[Jessica Mention]

January also is typically a very strong month in the markets, and it sort of sets the stage since we are in the what traders and analysts call the pre election year, the year before the election. Typically the market does perform well, and that's usually because incumbents will implement new policies or put for lower taxes ahead of the election in an effort to boost the economy. The only sort of caveat to that is we did see Congress cut rates at the end of 2017, and that did filter through into 2018 with a boost to earnings growth. When you're looking at companies, especially in the S&P 500, and you're looking at how well the economy performed versus its peers globally in 2018, the question sort of is, can the US remain the standout compared to its peers?

[J.R. Whalen]

And by Congress cutting rates, you mean the corporate tax rates?

[Wall Street Journal Reporter]

Yes.

[J.R. Whalen]

Okay. Now, if there's anything that could hold back the market from popping and moving higher, it's this ongoing thing around our next, which is the trade questions with China.

[Jessica Mention]

There's been so many different narratives that have hung over the markets for the past few months, one of which is the ongoing trade tensions as well as the concerns of slowing global growth and

[Wall Street Journal Reporter]

sort of the Federal Reserve and the uncertainty that there was about whether or

[Jessica Mention]

not they would be flexible. Now that the Fed's come out a few times now with more dovish statements, I think obviously the market has welcomed that those concerns, but over the next 90 days.

[Wall Street Journal Reporter]

So officials are meeting this week to discuss trade negotiations with officials in China.

[Jessica Mention]

And it's supposed to go on up until the beginning of March.

[Wall Street Journal Reporter]

So there could be a situation where there is more clarity and that could turn some of that uncertainty around in the markets. But at the same side of that, if there continues to be uncertainty with

[Jessica Mention]

regard to that situation, then that could be the driver of what could inhibit the markets for continuing to propel higher.

[J.R. Whalen]

I mean, good news or bad news, the market does not like uncertainty. They just want to know. Give it to me straight.

[Wall Street Journal Reporter]

Exactly, exactly.

[J.R. Whalen]

But you know, strategists you spoke to for your story, they suggest specific investments for the latter stage of economic expansions, which we're in right now.

[Wall Street Journal Reporter]

Something that's interesting. If you're looking at say some of the most held back stocks, especially in the last quarter, that have been hurt by a lot of these trade tensions, it's industrial stocks. So if you're looking at Caterpillar bow, those have both lost more than 10% over the last three months. If you're looking at the later stages

[Jessica Mention]

of an economic cycle, which people are arguing, since we are in the 10th year of the bull market, you know, where can we position ourselves? And a lot of the money managers that I've spoken with have suggested industrials along with energy, which have clearly been beaten up the last few years because of what we've seen with oil prices and especially over the last few months with oil, US Oil prices and global oil prices in a bear market again. But they do typically perform well in the latter stages as well as if you're looking at small cap stocks. If we say, for instance, looking at the Russell 2000, that's another benchmark that has definitely gotten decimated and is in a bear market. But those smaller cap stocks, because they're more domestic focused, those also perform well in the latter stages. So those are definitely areas that I've seen more money managers position themselves in.

[J.R. Whalen]

And since we're talking about what can be expected, it's important to mention a note in your story that stock declines that occur in January, if it's a broad decline, that can actually spell trouble for the rest of the year, it

[Jessica Mention]

doesn't bode well for the markets. I did get some analysts at CFRA Research to pull some data for me. And they were saying that when the market was up in January, and that's really referring to the S&P 500, the market was higher 83% of the remaining 11 months. And that was for looking at all January's. And then if you're looking just Those pre election third years, the market was up 81% of the time. Then I was looking at the Stock Traders almanac. And since 1950, anytime the s and P has finished lower in January, it's either gone before preceding a bear market, during a bear market, or the market ended up flat or in some sort of correction. And a lot of it has to do. There's all sorts of different indicators you can look at, but there's this January effect which really refers to, refers to how small cap stocks or beaten down stocks in January. A lot of portfolio managers want to

[Wall Street Journal Reporter]

get them out for tax purposes and

[Jessica Mention]

then they become cheaper and they have better valuations in January. And sometimes, you know, you'll see people come in and scoop those up. So it'll be interesting at the end of the month if we see a lot of pros go in and start buying that because it could be an indication of maybe how the year will play out.

[J.R. Whalen]

All right, Good reason to keep it tuned to the markets team here at the Wall street journal on WSJ.com and the WSJ. And that's our Journal reporter Jessica Mention here with us in our studio. Jessica, thanks for being with us.

[Jessica Mention]

Thanks for having me.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Infliction is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Spokesperson]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.