Following last year’s “Santa Claus rally”, the markets ushered in the “January Effect” to kickstart the new year 2022. However, some market analysts believe that US stocks will suffer from a series of negative factors in early 2022, including a more hawkish Fed and rising inflation. These factors will put significant pressure on U.S. companies’ fourth-quarter earnings performance, especially with U.S. stock valuations approaching 5-year highs. Given these risk factors, the markets may not be as bullish as expected under the “January effect” as the year begins. So, how should investors make investment decisions? Which stocks are worth buying, and which ones should they avoid?
What is the “January Effect”?
The “January Effect” is an old Wall Street theory that the stock market will always rise at the beginning of the year. The “January Effect” was first observed in the United States, but scholars in other countries also discovered that the law applies in other stock markets.
As for the reasons behind the “January Effect”, some scholars believe that it has a lot to do with tax strategies related to the “capital gain tax” in the United States. The window dressing of fund performance by investment firms, the year-end bonuses for fund employees and the crucial holidays at the end of the year in the United States. For example, the deadline for filing tax returns in the United States is the end of December each year. To reduce their tax payment, investors typically choose to sell their stocks at a loss that they can deduct from their annual tax bill before the year ends. But in January of the following year, investors have a clean slate and can start reinvesting. Investors will re-enter the market and put the funds cashed out in December back into the stock market by buying their favorite shares, thereby lifting the stock markets.
Statistical results also show that the stock market return in January is often positive, confirming the existence of the “January effect”. At the same time, the rise and fall of the stock market in January each year often determines the overall trends for the entire year. If the market rises in January, the stock market tends to have a greater chance of rising throughout the year; if the market falls in January, the chances of it falling throughout the year are much higher.
How does this year’s “January effect” affect the stock market?
The US non-farm payrolls data for December was lower than expected, the unemployment rate also fell more than expected as the US labor market became increasingly tight. The U.S. stock market was under intense pressure, falling for four consecutive trading days, to set the worst first-week performance since 2016. Therefore, many are looking forward to the follow-up performance of the stock market during the rest of January.
JPMorgan said in the report that it is optimistic about high-beta stocks and believes that historical analysis shows high-beta stocks tend to perform best in January. However, given the extreme positions and market sentiment, the firm expects the upcoming “January effect” to be more pronounced this time around, with the potential for a massive short squeeze in high-beta stocks.
JP Morgan’s chief strategist for US stocks said in the report that in terms of long-term growth, segments with high beta coefficients such as payments, e-commerce, gaming, cybersecurity, and biotechnology have seen their valuation multiples cut. However, the fundamentals of most investment themes in the markets remain unchanged and will continue to grow strongly since the potential market size is massive.
However, some analysts believe that the impressive gains in December will cause the stock market to remain flat in January. Mike Bailey, head of research at FBB Capital Partners, said that the December rally that rewarded many investors could dilute January’s performance.
Interactive Brokers chief strategist Steve Sosnick believes that the Fed will be the biggest concern for investors. When the Fed finally starts reducing its bond purchases sharply, the markets may react negatively, with higher volatility in the stock market or even a correction.
The US corporate earnings season is coming. Which companies are worthy of attention?
As the fourth-quarter earnings season for U.S. stocks starts this month, the stock market’s performance will be more volatile. The financial reports of TSMC, Netflix, Tesla, Apple, Microsoft, Facebook and other companies tend to attract significant market attention. Among them, Tesla is about to announce the full-year delivery data, and Apple Inc is set to reveal the market performance of the iPhone 13 in its financial report.
The upcoming earnings season is set to be affected by the Federal Reserve’s hawkish one and the rising likelihood of a rate hike, which will create uncertainty in the stock markets. As interest rates rise in the future, investors may rethink their investment plans for the year. In addition, it is unclear if a surge in corporate profits will lead to rising markets driven by positive sentiment. Therefore, the market performance after the earnings season in January is particularly crucial. Hence, investors should pay close attention to the overall performance of most companies.
At the same time, Wall Street analysts have made investment recommendations for investors. Due to the steady rise in stock market demand, the analysts believe that the following seven stocks have the best business growth prospects. The stocks include US pharmaceutical giant Pfizer, the largest US steel producer Nucor Steel, and American car rental company Avis. Other companies are select international hotels, famous American casual shoe brand Crocs, and leading natural gas and liquefied natural gas company Targa Resources Investment.