What’s Going On Here?

The US stock market hit even higher record highs, putting investors well on track for a positive January return, suggesting a good new year too…

What Does This Mean?

• The “January effect” is a phenomenon whereby stocks typically rise at the start of the year – and data shows that if that momentum continues into February, it almost always culminates in a positive year for stocks.
• There are various explanations for the trend: it’s possible, e.g, that investors grow more confident in the year’s earnings growth outlook after optimistic early company updates.
• This January’s already offered investors other reasons:
  • the US government approved its new trade agreement with Canada and Mexico, and signed a deal with China the same week,
  • unexpectedly positive earnings from banks at the core of the US economy,
  • growth in retail sales, and
  • better-than-expected manufacturing and housing data

probably fueled some stock-buying activity too.

Why Should I Care?

For you personally: Fear of missing ouch.

• The funny thing about stock market records is that, once hit, any further increase becomes a record too. That might trigger FOMO for some investors, but Finimizers should be savvy enough to resist the temptation to unbalance their investment portfolios.
• In the event of an unexpected slowdown like the UK’s currently experiencing or even a recession, in a balanced portfolio, investments in safer assets (e,g, bonds) offset any losses from stocks.

For markets: Too close to the sun?

• By some measures, US stocks are the most expensive they’ve been since the 1980s relative to earnings growth expectations; their prices may soon fall.
• Over time, stock markets tend to rise, however, so a short-term drop isn’t necessarily cause for panic – and if one does come, long-term investors might consider “buying the dip”.

“Buy the dip” is a phrase that refers to purchasing an asset after its price has been subject to a decline.

Content source: Finimize. (2020) Positive Signs. Available from: https://www.finimize.com/wp/news/positive-signs/ [Accessed 20 January, 2020]