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Jan 7, 2019

Markets: January Could Be a Boon for Battered Stocks

The Wall Street Journal.
Markets Bear logo.
It's a jam-packed week. I'm Jessica Menton, giving you a rundown on what to watch in markets as stock futures edge lower following Friday's surge.
Today includes a crucial new round of trade negotiations between the U.S. and China. This morning, we're awaiting service-sector data, which tracks industries including health care, finance and construction, for signs of steady U.S. economic growth.
We'll parse minutes on Wednesday from the Federal Reserve's latest meeting, which will likely show how officials viewed conflicting signals from the economy at the end of 2018. Investors will also keep their eyes on consumer-price data Friday for clues on whether inflation is picking up.
Plus, I dive into why January is historically a strong month for stocks. 

Markets in a Minute

Markets Data

Overnight Developments

If History Proves Right, Stocks Are Set to Climb

This month marks a historically strong period for stocks.
Friday’s big rally in stocks helped erase the worst two-day start to a year since 2000. For investors who track seasonal patterns in markets, it also pointed major indexes in the right direction.
Not only is January typically a strong month for stocks—a phenomenon known as the January effect, which some analysts attribute to investors buying new shares after tax-loss selling in December—historical data suggests this month is poised to be even better than normal. That’s because it comes in the third year of the presidential election cycle, which some analysts say is typically the best for equities.
In pre-election years since 1950, the S&P 500 has delivered its best performance in January, posting an average climb of 3.9% for the month, according to the Stock Trader's Almanac. Part of the reason: incumbents typically implement new policies, or push for lower taxes ahead of a presidential election in an effort to boost the U.S. economy, some analysts said.
One factor that could boost stocks is a thaw in trade tensions between the U.S. and China. Trade concerns have weighed on investors’ outlook for economic growth during recent market declines, and officials for the two countries are engaged in 90-day trade negotiations scheduled to end in March.
Signs of a strong U.S. labor market and dovish commentary from Federal Reserve Chairman Jerome Powell helped alleviate some economic concerns and powered a more-than 3% rally in the Dow industrials on Friday. Easing trade tensions could propel further gains.
If the U.S. and China find a resolution, investors expect that trade-sensitive stocks like industrials, which have tumbled about 17% in the S&P 500 over the past three months, to lead a relief rally. Machinery company Caterpillar and aerospace giant Boeing have been among the hardest hit, slumping 16% and 15%, respectively, since early October.
Some investors, though, think the January trend may not hold up this year. Congress already cut tax rates in December 2017, helping stimulate the economy and boost earnings growth in 2018.
One thing that could limit a further rebound: slower earnings growth. For the first time in two years, analysts in December cut their 2019 earnings forecasts on more than half the companies in the S&P 500, according to FactSet. They expect earnings for companies in the index to grow 7.4% in 2019, down from their forecast of 10.4% at the end of September, the data showed.

Market Facts

  • The S&P 500 rallied 3.4% Friday, its largest percentage gain on a jobs-report day since December 2008.
  • Financial-sector funds posted a collective net outflow of $17.2 billion in the final three months of 2018, their biggest quarterly outflow on record, according to fund tracker EPFR.
  • On this day in 1992, the technology-heavy Nasdaq Composite eclipsed the 600 threshold, finishing the day at 602.29.

Key Events

The Institute for Supply Management's nonmanufacturing index for December, due at 10 a.m. ET, is forecast to slip to 58.4 from 60.7 a month earlier.

Must Reads

Even observers who have been cutting their targets remain relatively upbeat about the stock market’s prospects this year. PHOTO: SHANNON STAPLETON/REUTERS
Market swings are pushing analysts to revise Wall Street forecasts. With volatility showing no signs of letting up, some companies are reconsidering their projections for where major indexes will stand at the end of the year.
The chip slump may not hurt chip investors. Even as the memory-chip industry boomed last year, share prices plunged. But the pattern in 2019 could be just the reverse.
The Fed faces a fresh test: Managing a soft economic landing. The central bank’s challenge is to manage a moderation in growth that keeps inflation contained but avoids a recession.
How estimates of the gig economy went wrong. Two leading experts on the “gig economy” now say their estimates of its impact were too high, skewed by spotty data and the recession of a decade ago.
Trouble in paradise: Coconut oil prices are slipping and sliding. Coconut oil prices have dropped by more than half over the past year as the commodity, which has a high saturated fat content, has fallen out of favor in kitchens and factories.
Activist investor Starboard is seeking changes at Dollar Tree. Starboard Value has taken a stake in Dollar Tree and is pushing the retailer to sell its Family Dollar business and tweak its pricing model.
More deal-making in the biopharmaceutical sector. Eli Lilly has agreed to buy Loxo Oncology for $235 a share, or about $8 billion, in cash in a deal that comes days after Bristol-Myers Squibb said it is acquiring Celgene.

What We've Heard on the Street

“What if 2019 is a good year for U.S. workers but a bad one for U.S. companies?”
—Heard on the Street columnist Justin Lahart

Stocks to Watch

PG&EThe utility operator said late Friday it plans to shake up its board as it responds to concerns that it could face billions of dollars in liabilities related to the recent deadly wildfires in California. PG&E shares have lost nearly 50% since early October.

Netflix: Shares of the video-streaming company jumped 10% Friday to their highest close since Nov. 9, after analysts at Goldman Sachs assigned a $400 price target on the stock over the next 12 months. 
Alibaba: Shares of the Chinese e-commerce giant snapped a three-day losing streak Friday, rising 7%—their largest percentage increase since June 2017. 
Advanced Micro Devices: The chip maker's stock was the best performer in the Nasdaq 100 Friday, climbing 11%—its biggest percentage rise since Sept. 4.

Source: WSJ

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