January and the Trump rally

The first couple of weeks in January are usually bad ones for stocks.  Taxable investors typically start their annual portfolio revamping by selling their losers near yearend but they tend to nurse their winners into the following tax year.  From the first trading day in January on, they aggressively prune or jettison profitable positions they no longer think will outperform.

As a result, stocks usually go down in early January.

(An aside:  December losers, especially small caps selling for below $5 a share, tend to bounce back sharply from late-year lows in January.  This is called the “January effect.”  I don’t think it will play an important role this year.)

Not so, so far in 2017.  Instead, the upward movement in the S&P 500 triggered by the surprise election of Donald Trump as president has continued.

Two key differences between today and the last two months of 2016:

–the US$ has, at least for the moment, stopped rising, and

–the market seems to be rotating away from putative Trump administration beneficiaries into left-behind sectors like IT and REITs.

What does this mean?

I think it says that the initial rally on the anticipation of possible pluses from an end to dysfunction in Washington–corporate tax reform, infrastructure spending, and a more normal monetary policy–is getting long in the tooth.  Yes, economic growth appears to be accelerating and consumer confidence is rising.  But potential winners from a Trump administration have advanced by, let’s say, 20% since the election, while more defensive issues have fallen.

Investors are shifting from being driven by concept to being motivated by valuation.  They think, correctly in my view, that the leaders are looking a bit pricey and laggards are looking like relative bargains.  So they’re moving from the first group to the second.

What happens next?

Absent new information, or new inflows of money to equity managers, the market is likely to stall and then sag a little.   The most important factor here is the consensus expectation that the S&P 500 is likely to rise by about 5% for the year as a whole–which would imply there’s severely limited upside, at least until we get further concrete information about the economy or about Congress.

My guess is that the next major move is up.  If so, it will be triggered either by surprisingly good economic data or by bold action to stimulate the economy from Congress.  We should be watching carefully for either.

In the meantime, we can deepen our analysis of Trump beneficiaries, especially, I think, in the Energy sector.  My sense is, day traders aside, there’s no reason to sell (of course, I’m bullish by disposition, so this is my default position).





the January effect

Mutual funds and ETFs typically have an operating year that ends on Halloween.  They do their year-end tax selling in September and October.

Other taxable investors, like insurance companies and you and me, have tax years that end on New Years Eve.  So  we all do our year-end tax selling in December.  We sell stocks we have losses in.

Smaller-cap, low share price, limited liquidity speculative stocks, which are mostly the domain of retail investors, are particularly hard hit during December.  Part of this is the volume of selling; part is marketmakers who are loathe to take on inventory and who can sense anxious sellers, dramatically lower their offers.

what it is

Just as there’s most often a November stock market rebound from mutual fund/ETF selling, there’s also typically a January rebound from December tax selling.  This is the January effect.

It has two parts:

–the losers from the prior December rebound.  Again, this is partly that new buyers appear, attracted by now-lower prices, partly that marketmakers respond by raising their bids.  Low share price speculative stocks normally lead the parade.

–investors of all stripes tend to defer sales of stocks where they have gains until the new calendar year rolls around.  This is also income tax-related.  If for no other reason than some investors want to trim the size of their winning positions, the prior year’s big gainers typically open the year poorly.

how long it lasts

The January effect usually lasts about two weeks;  some years, however, it goes on for most of the month.

this January?

This January my guess is that energy stocks, which have sold off heavily throughout 2015, will show at least a temporary rebound.  My worry about them, other than that current financials aren’t yet available, is that the seasonal low point for demand is still ahead of us.  That’s normally in late January-early February.

It may also be that the stars of 2015, like Amazon and Netflix, will take a step backward.

It will be interesting to observe how the new month starts out.