What's going on?
The US stock market hit even higher record highs last week, putting investors well on track for a positive January return. And history suggests that a good January for stock markets usually leads to a good year too…
What does this mean?
The “January effect” is a phenomenon whereby stocks typically rise at the start of the year – and eight decades of data shows that if that momentum continues into February, it almost always culminates in a positive year for stocks. There are various mooted explanations for the trend: it’s possible, for instance, 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 to be positive: the US government approved its new trade agreement with Canada and Mexico in the same week it signed a deal with China. 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 – no matter how minuscule – 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, the idea is that, in a balanced portfolio, investments in safer assets (like, say, 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 to pass, long-term investors might consider “buying the dip”.